A Rationale for Imperfect Reporting Standards

52 Pages Posted: 6 Jun 2018 Last revised: 7 Oct 2019

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

John S. Hughes

University of California at Los Angeles

Beatrice Michaeli

University of California, Los Angeles (UCLA)

Date Written: February 1, 2018

Abstract

The aim of general purpose financial reporting is to provide information that is useful to investors, lenders, and other creditors. With this goal, regulators have tended to mandate increased disclosure. We show that increased mandatory disclosure can weaken a firm's incentive to acquire and voluntarily disclose information. Specifically, we provide conditions under which a regulator, seeking to maximize the total amount of information provided to investors via both mandatory and voluntary disclosures, would impose an imperfectly informative mandatory reporting regime even when a perfectly informative regime entails no direct costs. The results contribute to our understanding of potential interactions between mandatory reporting and voluntary disclosure, and demonstrate a novel benefit of accounting standards that mandate imperfectly informative reports.

Keywords: information gathering, financial reporting, disclosure

JEL Classification: D82, G38, M41, M48

Suggested Citation

Friedman, Henry L. and Hughes, John S. and Michaeli, Beatrice, A Rationale for Imperfect Reporting Standards (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=3183482 or http://dx.doi.org/10.2139/ssrn.3183482

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Beatrice Michaeli

University of California, Los Angeles (UCLA) ( email )

D415 Anderson Complex
Los Angeles, CA 90095
United States

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