On the Frequency, Quality, and Informationl Role of Mandatory Financial Reports

Abstract

In this paper we study the relation between the frequency of mandatory financial disclosures, the amount of information voluntarily disclosed by privately informed managers, and the resulting informational efficiency of stock prices. Our analysis emphasizes the confirmatory role of mandatory financial reports and uses frequency to highlight the difference between this view of reporting and the prevailing view of mandatory disclosures as sources of information. We model the mandatory financial disclosures as verifiable but noisy and, possibly, late signals of management's private value-relevant information. Accordingly, financial statements may be of little use as a timely, primary source of information for the purpose of valuing the firm. However, since the audited statements can be used to evaluate the truthfulness of management's past voluntary disclosures (i.e., to confirm that they are indeed truthfully, they may be useful in creating an environment in which management