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Review of Accounting Studies

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03.02.2021

Voluntary versus mandatory disclosure

verfasst von: Jeremy Bertomeu, Igor Vaysman, Wenjie Xue

Erschienen in: Review of Accounting Studies | Ausgabe 2/2021

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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.

Vorheriger Artikel Correction to: Management forecasts of volatility

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While the terminology of conservatism is proper to accounting research, the debates are broader than only financial reporting. Regulations that stipulate which types of news must be disclosed are ubiquitous, especially with respect to potentially negative news. Pharmaceutical companies must test drugs and disclose the results of clinical trials, including the drugs’ side-effects (Ma et al. 2015). The Affordable Care Act mandates quality reporting by hospitals (Dranove and Jin 2010). And federal education initiatives and many states’ laws require schools to disclose performance statistics.

Of course, there are also pieces of information that cannot be made credible, and these are not the focus of this study; see Bertomeu (2015) for a discussion of voluntary reporting of “soft” news.

This feature is immediate without productive decisions, given that disclosures are costly, but the intuition holds more generally in the context of productive decisions where more information is desirable. In Section 4, we show that the same result is magnified with productive effects of disclosure.

In the benchmark model, there is no cost to verify that a firm is not subject to mandatory disclosure, as this verification occurs ex post, when private information is public. Below, in Section 5.1, we consider the possibility that verifying that a firm is not subject to mandatory disclosure is costly. Also, while our benchmark analysis considers constant disclosure cost c, the main results hold if the cost is a nondecreasing function c(x), as long as \(\left [x-c(x)\right ]\) is increasing. The proof of this is available upon request.

If the entire cost were redistributive, that is, fully recovered by another party, then optimal policies would prescribe full disclosure. We employ a model of costly disclosure, instead of the alternative approach involving uncertainty about information endowment, because it is nontrivial to consider forcing firms to disclose in a model where managers cannot credibly prove that they are informed; see Ebert et al. (2014) for a recent example. Dye (2017) analyzes a formal model of verification by a fact checker; we conjecture that many insights in the current model would carry over to a related setting in which the firm has access to a costly fact-checking technology.

In Section 4, we extend our analysis to a more general setting, in which P(r) is a convex function of posterior expectations, which implies that information has social value.

A voluntary disclosure equilibrium may not be unique. As noted in Definition 2 and consistent with the literature (Glode et al. 2018; Rappoport 2017), we select the equilibrium preferred by the party designing the mechanism.

The equilibrium that achieves the lowest disclosure cost is well defined as long as an equilibrium exists. The reason is that the function \(t-c-\mathbb {E}(\tilde {x}|\tilde {x}\notin D_{m}, \tilde x\leq t)\) is continuous in t, so that for any convergent sequence {t_i} that satisfies \(t_{i}-c-\mathbb {E}(\tilde {x}|\tilde {x}\notin D_{m}, \tilde x\leq t_{i})=0\) for all i, its limit \(t_{\infty }\) satisfies \(t_{\infty }-c-\mathbb {E}(\tilde {x}|\tilde {x}\notin D_{m}, \tilde x\leq t_{\infty })=0\), and therefore \(t_{\infty }=\max \limits _{\mathcal {E}} \tau (D_{m}|\mathcal {E})\).

Log-concavity plays a similar role in adverse selection models, where it is imposed to ensure that local incentive compatibility constraints imply global incentive compatibility (Baron 1982).

This formulation focuses on an investment decision by a manager with no conflict of interest with shareholders, apart from horizon issues. Managing the information environment presents many interesting issues when information may also be used as an incentive device (Arya et al. 1997), and it remains an ongoing question as to when insights from persuasion theory extend to stewardship problems.

To illustrate, in our setting, suppose that a receiver makes an investment I to maximize \(\mathbb {E}(\tilde x I-I^{2}/2|r(\tilde x))\), choosing \(I=\mathbb {E}(\tilde x|r(\tilde x))\), which implies total value \(\mathbb {E}(\tilde x|r(\tilde x))^{2}/2\), that is, mapping to a function ϕ(x) = x²/2. See Kamenica and Gentzkow (2011) and Kartik et al. (2017), supplementary appendix B.3.

The constraint qualification ensures that the problem can be solved with Lagrangian multipliers. We could not find any examples in which the qualification did not hold.

We thus assume that liquidation is no longer available once the voluntary disclosure is made – this is entirely innocuous to the extent that the firm can anticipate the price that follows the disclosure.

This also implies that our main lemons market results can be easily adapted to generalize the optimal liquidation problem in Section 4.2 to the case in which the liquidation payoff depends linearly on the firm’s type.

This assumption is with little loss of generality for our main results. If there are multiple solutions, it can be shown that the largest root is the preferred equilibrium, which implies the maximal amount of trade.

Although the externality argument is a clear reason for intervention (Dye 1990), it is not entirely uncontroversial. Information externalities are not as obvious as pollution or health externalities, and their economic significance is still the subject of ongoing research. Theoretically, information intermediaries may act to collect and trade information, and, in a world where such externalities are significant, the market will find solutions to disseminate information (i.e., firms will sell their information or pool their information into industry associations).

See the proof of Proposition 1.

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Titel: Voluntary versus mandatory disclosure
verfasst von: Jeremy Bertomeu
Igor Vaysman
Wenjie Xue
Publikationsdatum: 03.02.2021
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2021
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-020-09579-0

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