A Rationale for Imperfect Reporting Standards

Henry L. Friedman (), John S. Hughes () and Beatrice Michaeli ()
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Henry L. Friedman: Anderson School of Management, University of California, Los Angeles, California 90095
John S. Hughes: Anderson School of Management, University of California, Los Angeles, California 90095
Beatrice Michaeli: Anderson School of Management, University of California, Los Angeles, California 90095

Management Science, 2022, vol. 68, issue 3, 2028-2046

Abstract: The aim of general purpose financial reporting is to provide information that is useful to investors, lenders, and other creditors. With this goal, regulators have tended to mandate increased disclosure. We show that increased mandatory disclosure can weaken a firm’s incentive to acquire and voluntarily disclose private information that is not amenable to inclusion in mandated reports. Specifically, we provide conditions under which a regulator, seeking to maximize the total amount of information provided to investors via both mandatory and voluntary disclosures, would mandate less informative and more conservative financial reports even in the absence of any direct costs of increasing informativeness. This result is robust to allowing the firm to make reports more informative and to imposing a nondisclosure cost or penalty on the firm. The results and comparative statics analysis contribute to our understanding of interactions between mandatory reporting and voluntary disclosure and demonstrate a novel benefit to setting accounting standards that mandate imperfectly informative reports.

Keywords: information gathering; financial reporting; reporting standards; disclosure (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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