A Rationale for Imperfect Reporting Standards

Management Science, forthcoming

56 Pages Posted: 6 Jun 2018 Last revised: 22 Dec 2020

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Anderson School of Management

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 private information that is not amenable to inclusion in mandated reports. 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 mandate less informative and more conservative financial reports even in the absence of any direct costs of increasing informativeness. This result is robust to allowing the firm to make reports more informative and to imposing a nondisclosure cost or penalty on the firm. The results and comparative statics analysis contribute to our understanding of interactions between mandatory reporting and voluntary disclosure, and demonstrate a novel benefit to setting 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). Management Science, forthcoming, 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) - Anderson School of Management ( email )

110 Westwood Plaza
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 )

D410 Anderson Complex
Los Angeles, CA 90095
United States

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