Is Silence Golden? Real Effects of Mandatory Disclosure
Review of Financial Studies, Forthcoming
49 Pages Posted: 5 Jul 2018
Date Written: June 24, 2018
While mandatory disclosure provides benefits, it also entails costs. One such cost concerns managerial learning – by discouraging informed trading, disclosure could reduce managers’ ability to glean decision-relevant information from prices. Using mandatory segment reporting in the U.S., we uncover a reduction in investment-q sensitivity, indicating lower investment efficiency after regulation. Consistent with learning, the lower sensitivity is concentrated in firms with more informed trading and lower financing constraints. Constrained firms exhibit no change in investment-q sensitivity, suggesting that they enjoy countervailing benefits via greater financing and stronger governance. Overall, we document a novel link between mandatory disclosure and real effects.
Keywords: Managerial learning, mandatory disclosure, investment, feedback effects
JEL Classification: G01, G21, M41
Suggested Citation: Suggested Citation