Incentives for Voluntary Disclosure
New York University (NYU) - Department of Accounting
Varda Lewinstein Yaari
AFA 2001 New Orleans Meetings; NYU Ctr for Law and Business Research Paper No. 01-005
Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firms for misrepresentation or omission. Since firms are principal-agent contracts between owners, contract designers and privately informed managers, owners are the ultimate firms' voluntary disclosure strategists. We analyze voluntary disclosure equilibrium in a game with two types of owners: expected liquidating dividends motivated (VMO) and expected price motivated (PMO). We find that Rule l0b-5: (i) does not deter misrepresentation and may suppress voluntary disclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news.
Number of Pages in PDF File: 76
Keywords: Rule l0b-5, disclosure, noisy rational expectations equilibrium, principal-agent contracts, incentives
JEL Classification: G10, G30, K22, D82
Date posted: April 2, 2001
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