A Cost-Benefit Analysis of Mandatory and Voluntary Corporate Disclosure

Abstract

Disclosure is important for corporate financing and business activities, as explained by Signalling Theory and Principal-Agent Theory. Corporate disclosure can be divided into voluntary and mandatory. Driven by the pursuit of maximising economic benefits, companies are motivated to opt to disclose voluntarily, notwithstanding the self-interest of managers and the dilemma of free-riding reduces the incentives and role of such disclosures. This inherent limitation of voluntary disclosure mechanisms has catalysed the widespread adoption of mandatory disclosure requirements. However, a simplistic discussion of the advantages and disadvantages of voluntary versus mandatory falls short of providing a conclusion. To address this gap, this study incorporates a cost-benefit analysis framework from law and economics. The effectiveness of mandatory disclosure, conceptualized as a form of governmental intervention in economic activities, hinges on the balance between its implementation costs and the derived benefits. The value of mandatory disclosure is related to regulatory effectiveness, which in turn influences the costs borne by companies in meeting disclosure requirements and the challenges faced by investors in utilising disclosed information.