76 Pages Posted: 2 Apr 2001
Date Written: 2001
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.
Keywords: Rule l0b-5, disclosure, noisy rational expectations equilibrium, principal-agent contracts, incentives
JEL Classification: G10, G30, K22, D82
Suggested Citation: Suggested Citation
Ronen, Joshua and Yaari, Varda Lewinstein, Incentives for Voluntary Disclosure (2001). AFA 2001 New Orleans Meetings; NYU Ctr for Law and Business Research Paper No. 01-005. Available at SSRN: https://ssrn.com/abstract=155328 or http://dx.doi.org/10.2139/ssrn.155328
By Joshua Ronen