The Commitment Effect versus Information Effect of Disclosure - Evidence from Smaller Reporting Companies

Posted: 9 Nov 2009 Last revised: 3 Aug 2016

See all articles by Lin Cheng

Lin Cheng

The University of Arizona - Eller College of Management

Scott Liao

University of Toronto - Rotman School of Management

Haiwen Zhang

University of Minnesota

Date Written: December 15, 2010

Abstract

We examine the commitment effect provided by mandatory disclosure and the information effect of voluntary disclosure on market illiquidity by exploring a regulatory change that allows smaller reporting companies to reduce the disclosure of certain information in their SEC filings. This regime change allows us to separate the commitment effect provided by mandatory disclosure from the information effect of voluntary disclosure. We find that firms eligible to reduce their disclosure, but voluntarily maintain their disclosure level experience an increase in market illiquidity. We also find that the increase in illiquidity is more pronounced for firms with higher agency costs. These findings suggest that mandatory disclosure serves as a credible commitment mechanism and that losing such commitment by disclosure deregulation is costly in the absence of a loss of information. Our study suggests that while voluntary disclosure is effective in reducing information asymmetry, it cannot replace mandatory disclosure in addressing information problems.

Keywords: Disclosure Regulation, Mandatory Disclosure, Commitment

Suggested Citation

Cheng, Lin and Liao, Wei-Yi (Scott) and Zhang, Haiwen, The Commitment Effect versus Information Effect of Disclosure - Evidence from Smaller Reporting Companies (December 15, 2010). Accounting Review, Vol. 88, No. 4, 2013. Available at SSRN: https://ssrn.com/abstract=1503090 or http://dx.doi.org/10.2139/ssrn.1503090

Lin Cheng

The University of Arizona - Eller College of Management ( email )

McClelland Hall, Room 301Q
1130 E. Helen Street
Tucson, AZ 85721
United States

Wei-Yi (Scott) Liao

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Haiwen Zhang (Contact Author)

University of Minnesota ( email )

3-122 Carlson School of Management
321-19th Avenue South
Minneapolis, MN 55455
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,672
PlumX Metrics