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Rev Fin 2000; 13:479-519
© 2000 the Society for Financial Studies

Article

Forcing firms to talk: financial disclosure regulation and externalities

AR Admati and P Pfleiderer
Stanford University, USA
Correspondence to: A Admati, Graduate School of Business, Stanford University, Stanford, CA 94305-5015, USA
e-mail: admati@leland.stanford.edu

Abstract

We analyze a model of voluntary disclosure by firms and the desirability of disclosure regulation. In our model disclosure is costly, it has private and social value, and its precision is endogenous. We show that (i) a convexity in the value of disclosure can lead to a discontinuity in the disclosure policy; (ii) the Nash equilibrium of a voluntary disclosure game is often socially inefficient; (iii) regulation that requires a minimal precision level sometimes but not always improves welfare; (iii) the same is true for subsidies that change the perceived cost of disclosures; and (iv) neither regulation method dominates the other.


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