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03-02-2021 | Issue 2/2021

Review of Accounting Studies 2/2021

Voluntary versus mandatory disclosure

Journal:
Review of Accounting Studies > Issue 2/2021
Authors:
Jeremy Bertomeu, Igor Vaysman, Wenjie Xue
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Abstract

We develop a theory of asymmetries between voluntary and mandatory disclosure. Efficiently designed mandatory disclosure policies are substitutes for excessive voluntary disclosures. The efficient policy takes the form of a lower threshold below which firms must disclose bad news and an upper threshold above which firms voluntarily disclose good news. Hence mandatory disclosures are asymmetric and feature conservative reporting of bad news. The threshold to recognize bad news increases when information is more precise. We also characterize interactions between disclosures and real decisions in environments where information has social value: investment decisions, optimal liquidations, and adverse selection in a lemons market.

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