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.
The Analytical Tool (AT) is an integral part of the MTDS Toolkit, developed to provide a quantitative analysis as input to the MTDS decision-making process. The AT is a spreadsheet-based application that allows projecting cash flows as a function of: (i) existing debt; (ii) macroeconomic assumptions, i.e. the primary balance; (iii) new borrowing strategies; and (iv) financial variables, including interest rates and exchange rates. The tool then simulates different cash-flows under various scenarios. The output of the tool is a quantification of the costs and risks associated with a particular debt management strategy.
The AT facilitates the quantification of costs and risks for each strategy under consideration. By illustrating the consequences of following a particular strategy under various scenarios for macroeconomic and market variables, it gives insight into the key vulnerabilities embedded in the specific strategy under consideration. The output, generated by the AT is a number of cost and risk indicators, for example annual interest payment-to-GDP and the nominal stock of debt-to-GDP. Risk is measured in terms of the increase in cost, given a particular macro and market scenario, relative to the baseline. 1 The AT different cost and risk indicators, allow countries to focus on those measures most relevant for their needs.
An important strand of research in behavioural finance asks the question whether mispricings in financial markets (usually represented by irrational traders or sentiment) affect the financing and investment decisions of firms. Clearly, as Morck, Shleifer and Vishny [16] put it, if the stock market were [only] a sideshow, market inefficiencies would merely redistribute wealth between smart investors and noise traders and would not have feed back effects to investments at all. However, if stock prices influence real economic activity, then irrational traders can indirectly affect real activity as well.
The question how a rational manager, interested in maximizing firm value, should act when facing irrational investors has been tackled by Stein [27]. He shows that when a firms stock price is too high, a rational manager should issue more shares and take advantage of the mispricing, and when the price is too low, she should repurchase shares. Regarding what to do with the fresh capital, he also shows that non equity dependent firms should not invest straight to any investment opportunities but instead keep the money raised in cash. However, for equity dependent firms, market mispricing could matter and could also distort investment decisions. If, for example, a firm has to raise capital for new investments in an underpriced market, they may have to forgo attractive opportunities because it is too costly to finance them with undervalued equity. On the flip side, if a rational manager refuses to to undertake projects irrational investors percieve as profitable but actually they are not, they may depress stock prices or have him fired.The above stories lead to the prediction that investments of equity$dependent firms should positively correlate with stock mispricings.
