A Rationale for Imperfect Reporting Standards
44 Pages Posted: 6 Jun 2018 Last revised: 1 Jul 2020
Date Written: February 1, 2018
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.
A revised version of this paper, now titled "Financial reporting standards for firms that can gather and disclose private information" is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3636995
Keywords: information gathering, financial reporting, disclosure
JEL Classification: D82, G38, M41, M48
Suggested Citation: Suggested Citation