Voluntary versus Mandatory Disclosure
50 Pages Posted: 21 Nov 2016 Last revised: 18 Dec 2019
Date Written: October 4, 2019
We develop a theory of asymmetries between voluntary and mandatory disclosure. Efficiently designed mandatory disclosure policies are substitutes for excessive voluntary disclosures. The efficient policy takes the form of a lower threshold below which firms must disclose bad news, and an upper threshold above which firms voluntarily disclose good news. Hence, mandatory disclosures are asymmetric and feature conservative reporting of bad news. The threshold to recognize bad news increases when information is more precise. We also characterize interactions of disclosures and real decisions in environments where information has social value, e.g., investment, optimal liquidations, and adverse selection in a lemons' market.
Keywords: Disclosure regulations; securities laws; standards; conservatism; mechanism design
JEL Classification: M41; G18; K22; D82
Suggested Citation: Suggested Citation