Disclosure Paternalism

46 Pages Posted: 11 Aug 2021 Last revised: 30 Mar 2022

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School

Date Written: August 8, 2021


Investors lacking good judgment may miscalculate the strategic motives causing withholding of material information. The resulting inadequate professional skepticism encourages excessively optimistic expectations after a non-disclosure and breaks the economic forces inducing forthcoming voluntary disclosure. A regulator may intervene to correct the problem by mandating disclosure over events that would otherwise be withheld; however, such paternalistic interventions come with a drawback: over-protection prevents investors from learning to be skeptical through repeated experiences of non-disclosure losses. While an unregulated market will converge over time toward greater transparency, paternalism may lead to cycles characterized by high levels of compliance followed by excessive optimism. The model further predicts negative market reactions to regulation, an association between positive price drift and transparency, and when regulators prefer to shut down entire markets.

Keywords: communication, standard, regulations, accounting

JEL Classification: D4, D5, D6, M4

Suggested Citation

Bertomeu, Jeremy, Disclosure Paternalism (August 8, 2021). Available at SSRN: https://ssrn.com/abstract=3901405 or http://dx.doi.org/10.2139/ssrn.3901405

Jeremy Bertomeu (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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