Disclosure Policy and Enforcement: The Role of Corporate Boards

53 Pages Posted: 19 Oct 2023

See all articles by George Drymiotes

George Drymiotes

Texas Christian University

Zijun Liu

Rice University - Jesse H. Jones Graduate School of Business

Shiva Sivaramakrishnan

Rice University

Date Written: September 25, 2023

Abstract

The SEC holds corporate boards responsible for instituting proper controls to allay credibility concerns often associated with unaudited qualitative disclosures. In line with the SEC's stance on the board's role, we analyze a model in which the board (i) prescribes the firm's disclosure policy (a policy role), and (ii) chooses the extent to which it enforces compliance with the policy (a control role). The board's objective in our model is to balance profitability and a demand for information transparency from stakeholders, including shareholders, while contending with managerial incentives to inflate disclosures. We show that profitability concerns prompt a no-disclosure policy. However, the combination of profitability and transparency concerns induces the board to prescribe a pessimistic disclosure policy. Moreover, the board prefers a less pessimistic disclosure policy when it must contend with managerial incentives to inflate disclosures. Interestingly, the board exploits managerial incentives to inflate disclosures, which implies the board sometimes prefers to turn a ``blind eye'' to managerial over-reporting by being lax in enforcing compliance.

Keywords: Corporate Governance, Reporting Quality, Reporting Transparency, Disclosure Policy, Qualitative Disclosures, Disclosure Narrative

JEL Classification: G32, G38, L1, M41

Suggested Citation

Drymiotes, George and Liu, Zijun and Sivaramakrishnan, Shiva, Disclosure Policy and Enforcement: The Role of Corporate Boards (September 25, 2023). Available at SSRN: https://ssrn.com/abstract=4583135 or http://dx.doi.org/10.2139/ssrn.4583135

George Drymiotes (Contact Author)

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817 257 5448 (Phone)

Zijun Liu

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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