A Rationale for Imperfect Reporting Standards
52 Pages Posted: 6 Jun 2018 Last revised: 7 Oct 2019
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.
Keywords: information gathering, financial reporting, disclosure
JEL Classification: D82, G38, M41, M48
Suggested Citation: Suggested Citation