Limits to Voluntary Disclosure in Efficient Markets

JOURNAL OF ACCOUNTING, AUDITING AND FINANCE, Vol 11, No 3, Summer 1996

Posted: 25 Jun 1998

See all articles by Bharat Sarath

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Madhav V. Rajan

Booth School of Business, University of Chicago

Abstract

In competitive markets, prices offered by investors play a dual role: they must induce the firm to make truthful disclosures about its expected cash flows and they must also be efficient, i.e., equal the expected future cash flows to the buyer conditional on the disclosed information. We show that these requirements may exert opposing influences resulting in equilibrium disclosures being partial; that is, they might cause firms to reveal some, but not all of the valuation relevant information possessed by the firm. We then characterize the maximal level of information that can be elicited through efficient prices. We apply our analysis to the study of voluntary disclosures in the context of equity offerings, leases and sale of tax-loss carry-forwards and compare these to the level of currently mandated disclosures under GAAP.

JEL Classification: G12, G14, M40, M45

Suggested Citation

Sarath, Bharat Sarrukai and Rajan, Madhav V., Limits to Voluntary Disclosure in Efficient Markets. JOURNAL OF ACCOUNTING, AUDITING AND FINANCE, Vol 11, No 3, Summer 1996. Available at SSRN: https://ssrn.com/abstract=2641

Bharat Sarrukai Sarath (Contact Author)

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Madhav V. Rajan

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

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