Incentives for Voluntary Disclosure

Abstract

Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firmsfor 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 voluntarydisclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news.

Keywords: Rule l0b-5, Disclosure, Noisy rational expectations equilibrium, Principal-agent contracts