Incentives for voluntary disclosure |
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| Institution: | 1. MIT Sloan School of Management, United States\n;2. Boston College, United States\n;1. School of Science, Engineering and Design, Teesside University, Middlesbrough TS1 3BA, United Kingdom of Great Britain and Northern Ireland;2. c/o School of Science, Engineering and Design, Teesside University, Middlesbrough TS1 3BA, United Kingdom of Great Britain and Northern Ireland;3. Vindolanda, Bardon Mill, Hexham, Northumberland NE47 7JN, United Kingdom of Great Britain and Northern Ireland;4. Department of Archaeology, Durham University, Durham DH1 3LE, United Kingdom of Great Britain and Northern Ireland |
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| Abstract: | Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firms for misrepresentation or omission. Since firms are principal-agent contracts between owners – contract designers – and privately informed managers, owners are the ultimate firms’ voluntary disclosure strategists. We analyze voluntary disclosure equilibrium in a game with two types of owners: expected liquidating dividends motivated (VMO) and expected price motivated (PMO). We find that Rule l0b-5: (i) does not deter misrepresentation and may suppress voluntary disclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news. |
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