Financial Reporting Standards for Firms That Can Gather and Disclose Private Information

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 financial reports even in the absence of any direct costs of increasing informativeness. We show that this result is robust to allowing the firm to make reports more informative and to imposing a nondisclosure cost or penalty on the firm. These results and comparative statics analysis contribute to our understanding of potential interactions between mandatory reporting and voluntary disclosure, and demonstrate a novel benefit to setting accounting standards that mandate imperfectly informative reports.