Is Silence Golden? Real Effects of Mandatory Disclosure

Review of Financial Studies, Forthcoming

49 Pages Posted: 5 Jul 2018  

Sudarshan Jayaraman

University of Rochester - Simon Business School

Joanna S. Wu

University of Rochester - Simon Business School

Date Written: June 24, 2018

Abstract

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

Jayaraman, Sudarshan and Wu, Joanna, Is Silence Golden? Real Effects of Mandatory Disclosure (June 24, 2018). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3201828 or http://dx.doi.org/10.2139/ssrn.3201828

Sudarshan Jayaraman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Joanna Wu

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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