What Happens to Investor Disagreement When the Regulator Bans Voluntary Disclosure?

Abstract

Prior literature shows that disclosure can increase divergence of opinions among investors. Other studies indicate that questionable disclosures primarily mislead small (unsophisticated) investors, whereas large investors remain unaffected. Hence, such disclosures are likely to be associated with investor disagreement. Following this reasoning, I suggest that banning some types of voluntary disclosure can 'level the playing field' and decrease disagreement, thus benefiting (at least some) investors. I test this conjecture using a natural experiment in which a regulator imposed limitations on oil and gas corporations’ capacity to voluntarily report on their activities, with the goal of preventing the dissemination of incomprehensible and vague information. The findings indicate that after this new regulation came into effect, stock exchange filings of these corporations generated significantly less investor disagreement than they had before. Moreover, the regulation primarily affected disagreement associated with filings that investors perceived as conveying good news, whereas disagreement following filings containing bad news did not change. The evidence presented here is useful for regulators and standard-setters considering the extent to which firms should be permitted to exercise discretion in disclosing information.