Proprietary Costs and Disclosure Substitution: Theory and Empirical Evidence
55 Pages Posted: 23 May 2018
Date Written: May 4, 2018
A growing empirical literature suggests managers view mandatory and voluntary disclosure as substitutes. We formalize the intuition in this literature in the context of a simple model of mandatory and voluntary disclosure. We use our model to highlight the limitations of existing empirical intuition, and discuss conditions under which mandatory and voluntary disclosure are (and are not) substitutes. We consider a setting where mandatory disclosure is a disaggregated disclosure (e.g., a financial statement), voluntary disclosure is an aggregate disclosure (e.g., an earnings forecast), and the costs of voluntary and mandatory disclosure are distinct. In this setting, we show that concerns about the proprietary cost of mandatory disclosure motivate managers to reduce the quality of mandatory disclosure and substitute voluntary disclosure. We test our predictions using a comprehensive sample of mandatory disclosures where the SEC allows the firm to redact information that would otherwise jeopardize its competitive position. Consistent with our predictions, we find strong evidence that redacted mandatory disclosure is associated with greater voluntary disclosure.
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