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ecchia, 2007b). Finally, an individual firm‟s misreporting activities may have negative spillovers to related firms, governments, and investors. For example, Sidak (2003) argues that fraudulent disclosures and financial reports can send false signals to industry players about new investment opportunities, lead governments to pursue incorrect regulatory policies, and cause capital rationing in the industry. In summary, there are numerous reasons why an individual firm‟s disclosures extend beyond the firm itself. Moreover, the market-wide effects could be large in the aggregate while imposing relatively small costs on the disclosing firm. But as individual firms generally cannot internalize the market-wide benefits of their disclosure activities, even relatively small disclosure costs could deter socially optimal disclosure activities. As with other externalities, the problem is that firms trade off only the private (or firm-specific) costs and benefits only and hence do not provide the socially optimal level of disclosure. As discuss next, there are market and regulatory solutions to this problem. Moreover, it is important to recognize that the social value of disclosure can be greater or less than the private value of disclosure, and as a consequence, firms may provide too much or too little information. 2.4. The Economics of Mandated or Regulated Disclosure As many before us have noted, the existence of (net) benefits to voluntary disclosure is not sufficient to justify mandatory disclosure because firms have incentives to voluntarily provide information if the benefits exceed the costs (e.g., Ross, 1979). The idea of market-based disclosure incentives is best illustrated with the unraveling argument (Grossman and Hart, 1980; Grossman, 1981; Milgrom, 1981). Without corporate disclosures, investors are unable to

distinguish between good and bad firms and therefore offer a price that reflects the average value of all firms. So, firms with an above-average value have an incentive to disclose private information about their true value. Once these firms disclose, investors rationally infer that the average value of all non-disclosing firms is lower and adjust the price to reflect this expectation.

This reaction in turn triggers the remaining non-disclosing firms with values above the newly set market price to disclose information about their private value, and so on. In the end, all firms (except the worst) disclose their private information about value voluntarily. However, the preceding argument relies on a number of simplifying assumptions. For example, disclosure of private information and its verification must be low cost and investors must know that firms possess private information. Without these assumptions, the described full disclosure equilibrium may not prevail (e.g., Ross, 1979; Verrecchia, 1983; Dye, 1985; Jung and Kwon, 1988). However, even if these assumptions are violated, the general spirit of the

unraveling argument still applies: Firms are expected to voluntarily provide information if there are net benefits to disclosure because they ultimately bear the costs of withholding information. Thus, an economic justification of mandatory disclosure has to show that a market solution is unlikely to produce a socially desirable level of disclosure. Moreover, competition and private contracting can address market failure本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。