We examine the efficiency implications of a manager's financial reporting system choice and disclosure management. When a manager has some private information that is not captured by a firm's financial reporting system and may manipulate the financial report at some cost, we show that the manager may not choose the most precise financial reporting system. We examine how reporting system choice varies with the precision of the manager's private information captured by the reporting system, precision of information that is not captured by the reporting system, and the manager's cost of manipulating the report. We consider the effect of reporting discretion on the efficiency with which investors allocate resources.

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.

Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making.

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making.

This paper examines how the ex ante level of public scrutiny influences a manager's subsequent decision to misreport. The conventional wisdom is that high levels of public scrutiny facilitate monitoring, suggesting a negative relation between scrutiny and misreporting. However, public scrutiny also increases the weight that investors place on earnings in valuing the firm. This in turn increases the benefit of misreporting, suggesting a positive relation. We formalize these two countervailing forces–“monitoring” and “valuation”–in the context of a parsimonious model of misreporting. We show that the combination of these two forces leads to a unimodal relation. Specifically, as the level of public scrutiny increases, misreporting first increases, reaches a peak, and then decreases. We find evidence of such a relation across multiple empirical measures of misreporting, multiple measures of public scrutiny, and multiple research designs.

Reexamines the `uniformity versus flexibility' debate by considering the consequences of varying the amount of discretion managers have in reporting current period expenses. Effects of generally accepted accounting principles (GAAP) on the `internal agency problem' and the `external agency problem'; Exhibition of the undesirability of expanding discretion.