Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Customers

35 Pages Posted: 14 Oct 1997

Multiple version iconThere are 2 versions of this paper

Date Written: July 1997

Abstract

Numerous rules mandate the disclosure of information. This article analyzes why such rules are enacted. Specifically, 1) why wouldn't firms voluntarily disclose their private information; and 2) given that voluntary disclosure would not be forthcoming, who has the incentive to lobby for mandatory disclosure rules? Previous analyses of disclosure assume that all customers understand the disclosures that can be made. A key result in these analyses is that there is no role for mandatory disclosure. Either voluntary disclosure is forthcoming or if it is not, no one is better off with mandatory disclosure. We analyze a market in which not all customers understand the disclosures that can be made. We show that if the fraction of customers who would understand a firm's disclosure is too low, then voluntary disclosure may not be forthcoming. In this case, mandatory disclosure benefits some (possibly all) customers and may also benefit firms. Thus we identify a motive for someone to lobby for such rules. Our results suggest that we should find mandatory disclosure rules with regard to information that is relatively difficult to understand.

JEL Classification: D82, L14, L15, M41, M45

Suggested Citation

Fishman, Michael Jay and Hagerty, Kathleen M., Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Customers (July 1997). Available at SSRN: https://ssrn.com/abstract=35460 or http://dx.doi.org/10.2139/ssrn.35460

Michael Jay Fishman

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-8332 (Phone)
847-491-5719 (Fax)

Kathleen M. Hagerty (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8345 (Phone)
847-491-5719 (Fax)

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