Incentives for voluntary disclosure

Joshua Ronen, Varda L. Yaari

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageEnglish
Pages (from-to)309-357
Number of pages49
JournalJournal of Financial Markets
Volume4
Issue number4
DOIs
StatePublished - 1 Oct 2001

Keywords

  • D82
  • Disclosure
  • G10
  • G30
  • Incentives
  • K22
  • Noisy rational expectations equilibrium
  • Principal-agent contracts
  • Rule l0b-5

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