disclosures simply are not required in many jurisdictions outside the United
States, where it is generally believed that the potential costs to companies in
making such disclosures outweigh the capital market benefits of making the dis-
closures.- Finally, there are vast differences in companies’ voluntary disclosure practices.
Managers’ disclosure incentives vary dramatically, as do cultural norms and es-
tablished business practices, and there can be large differences in opinion as to
the relative costs and benefits of voluntary disclosures.
13.3 CORPORATE DISCLOSURE, LIQUIDITY, AND THE COST OF CAPITAL. A key
theme in this chapter is that corporate disclosure is best understood as it relates to
capital markets. Capital market participants have demanded change in disclosure
practices in recent years; regulators respond to these demands, and managers’ dis-
closure incentives are influenced by these demands (as well as legal requirements).
A distinct but closely related link between disclosure and capital markets is that
research has shown that expanded disclosure is associated with important capital
market-related benefits such as increased share liquidity and reduced cost of capital.^5
Enhanced disclosure reduces information differences (asymmetries) between corpo-
rate insiders (management) and outsiders. These information differences lead to
greater transaction costs and reduced liquidity in the secondary markets for a com-
pany’s equity shares.
If corporate managers’ incentives were perfectly aligned with those of their com-
pany’s shareholders, they would select disclosure policies providing maximum capi-
tal market benefits.^6 However, corporate managers’ incentives are not perfectly
aligned with those of shareholders.^7 Moreover, investors, creditors, regulators and
other capital market participants may desire disclosure that is not in the company’s
best interest. For example, shareholders might desire that information leading to a
drop in share prices not be disclosed.
Several solutions to these disclosure incentive problems have evolved. These in-
clude contracts between managers and their shareholders to ensure proper alignment
between these parties’ incentives and the use of information intermediaries (such as fi-
nancial analysts) to search for private information, and regulation. These mechanisms
are highly imperfect.^8 For example, even stringent regulation (such as that in the
United States and the United Kingdom) has failed to prevent catastrophic and highly
publicized disclosure failures. Ultimately, managers choose whether and how much to
disclose, even where laws and regulation dictate particular types of disclosure.
(a) Disclosure and Capital Market Quality: A Regulatory Perspective. Exhibit 13.1
presents the broad objectives for the regulation of investor-oriented equity markets,
13 • 4 CORPORATE FINANCIAL DISCLOSURE: A GLOBAL ASSESSMENT(^5) See for example, Amihud and Mendelson (1989, 1986); Botosan (1997); Botosan and Frost (1999);
Diamond and Verrecchia (1991); Healy and Palepu (1993); Healy, Hutton and Palepu (2002); Leuz and
Verrecchia (2000); King, Pownall and Waymire (1990); and Welker (1995). See Healy and Palepu (2001)
for a review of research on information asymmetry, corporate disclosure, and capital markets.
(^6) Of course, capital market advantages are not the only consideration in developing a corporate dis-
closure strategy. For example, the capital market benefits of a disclosure may be more than offset by com-
petitive disadvantages resulting from the disclosure.
(^7) See, for example, Carol A. Frost (1997), Lewellen et al. (1996), and Lennox (2001).
(^8) See Healy and Palepu (1993, 2001).