Ebook Capital-Market Effects of Corporate Disclosures and Disclosure Regulation
This article surveys the academic literature on the costs, benefits, and associated capital-market effects of disclosure requirements. It highlights the important interaction of disclosure requirements with other securities regulations and institutional factors within a country. Despite this focus on regulation, the article does not advocate the necessity of regulation or reforms to existing regulations in Canada. Instead, it emphasizes the tradeoffs that Canadian regulators, policy makers, and exchanges will face in evaluating potential reforms to Canadian disclosure requirements.
There are four main sections to this survey. The first section summarizes the key theoretical arguments on the costs and benefits of corporate disclosures, as well as the theory of disclosure regulation. The authors emphasize that the mere existence of benefits from corporate disclosures is not a sufficient economic justification for mandating these disclosures. The second section reviews empirical studies on firms’ disclosure choices and highlights that many studies do not directly speak to the issues and tradeoffs faced by regulators and policy makers. Moreover, the important point is made that voluntary disclosure studies cannot directly provide evidence on aggregate outcomes or the overall economic efficiency of disclosure regulation. The third section examines the market-wide effects of past regulatory events as well as studies that compare cross-sectional differences in regulations and market outcomes across countries or exchanges. These studies are reviewed in some detail because they can speak more directly to the economic consequences of disclosure regulations. The final section brings together various policy insights that can be derived from the literature.
Overall this survey emphasizes that there are various mechanisms and forces (e.g., market forces, institutional arrangements in the country) that influence outcomes such as corporate transparency aside from disclosure regulation. Moreover, there are interactions between these different mechanisms and forces. The survey shows that corporate transparency likely is a joint outcome of market forces and the incentives provided by various institutions and regulations and the quality of their enforcement. As a result, particular disclosure regulations should not be viewed in isolation from other economic factors, institutional arrangements, and regulations. The survey also highlights that it is important to study firms’ responses and avoidance strategies to regulatory events. For instance, stricter disclosure requirements for publicly-traded firms may trigger firms to go private or may change the type of firms that choose to go public. The possibility of avoidance strategies is further compounded by the growing integration of capital markets around the world. Cross-listings, raising capital from foreign investors, and related strategies provide firms with alternatives outside their home countries. The article concludes with a summary of key lessons and insights for the Task Force and policy makers in general.
Contents
1. Executive Summary
2. Summary of Key Insights and Lessons
3. Introduction
4. Theory of Corporate Disclosure Regulation
- i. Benefits of Corporate Disclosures
ii. Costs of Corporate Disclosures
iii. Theory of Disclosure Regulation
iv. Key Lessons and Insights
5. Empirical Evidence on the Costs and Benefits of Disclosure
- i. Types of Voluntary Disclosures
ii. Benefits of Voluntary Disclosures
a) Liquidity Benefits of Voluntary Disclosures
b) Voluntary Disclosure and Firms’ Cost of Capital
iii. Empirical Evidence on the Costs of Voluntary Disclosure
iv. Voluntary Disclosure Studies and their Implications for Disclosure Regulation
v. Key Lessons and Insights
6. Evidence on Disclosure Regulation
- i. Early Studies Evaluating Changes in Disclosure Regulation
ii. Recent Evidence on the Benefits of Changes in Disclosure Regulation
iii. Recent Evidence on the Costs of Changes in Disclosure Regulation
iv. International Evidence on the Costs and Benefits of Disclosure Regulation
v. International Evidence on the Importance of Countries’ Institutional Features
vi. Key Lessons and Insights
7. Summary of Key Lessons and Insights for the Task Force to Modernize Securities Regulation in Canada
Appendix Empirical Approaches to Measuring Accounting Quality
References
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