The Effect of Disclosure: from Capital Markets to Households

The effect of disclosures on capital markets is primarily attributable to sophisticated institutional investors who front-run retail individuals. This study examines the effect of disclosure on household decisions to shed light on whether unsophisticated economic stakeholders can also benefit from disclosure. Exploiting the state-level mandates of seller disclosure of housing conditions and employing a spatial regression discontinuity design, we investigate and document that mandatory seller disclosure leads to a reduction in time on market and absolute listing-closing price spreads. These results suggest that mandatory seller disclosure improves liquidity and reduces information asymmetry premium in residential real estate markets. We further find that the effect is more pronounced when buyers’ agents have less experience and in areas characterized by lower household income or education levels, which highlights the importance of mandatory seller disclosure in benefiting unsophisticated households. Our study expands the disclosure literature to encompass broader economic markets and offer insights into the pivotal role of disclosure in residential real estate markets.