The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

Mandatory disclosure regimes can have unintended consequences and are far from being innocuous.

“Yet, mandatory disclosure regimes can have unintended consequences and are far from being innocuous (see, e.g., Dranove and Jin 2010 and Leuz and Wysocki 2016 for further discussion and examples).”

Evidence on the causal effects of regulation is still scarce.

“First, evidence on the causal effects of regulation is still scarce.”

We typically lack evidence that allows us to perform quantitative cost-benefit analyses for a specific regulatory proposal or act.

“Second, we typically lack evidence that allows us to perform quantitative cost-benefit analyses for a specific regulatory proposal or act.”

New regulation does not occur in a vacuum, but interacts with other features of the institutional environment.

“Third, new regulation does not occur in a vacuum, but interacts with other features of the institutional environment.”

More and better disclosure can lead to tangible capital-market benefits in the form of improved liquidity, lower cost of capital, higher asset prices (or firm value), and potentially better corporate decisions.

“The general takeaway from this large literature is that more and better disclosure can lead to tangible capital-market benefits in the form of improved liquidity, lower cost of capital, higher asset prices (or firm value), and potentially better corporate decisions.”

There is considerable empirical work on the effects of reporting regulation, but this work also has important limitations.

“There is considerable empirical work on the effects of reporting regulation, but this work also has important limitations (e.g., discussed in Leuz and Wysocki 2016).”

A key insight from extant research in accounting is that disclosure can change a firm's investment behavior and other real activities.

“A key insight from extant research in accounting is that disclosure can change a firm’s investment behavior and other real activities (for overviews see Leuz and Wysocki 2016; Roychowdhury et al. 2019).”

Such a system could be costly, especially for smaller firms, as the debate on compliance with the Sarbanes-Oxley Act shows.

“Such a system could be costly, especially for smaller firms, as the debate on compliance with the Sarbanes-Oxley Act (SOX) shows (e.g., Coates and Srinivasan 2014; Leuz and Wysocki 2016).”