Essays on Mandatory Disclosure and Enforcement
Creators: name: Wenjie Xue
Publisher: name: Carnegie Mellon University
Year: 2019
Subjects: subject: 150199 Accounting, Auditing and Accountability not elsewhere classified
subject: FOS: Economics and business
subject: FOS: Economics and business

description: The purpose of this thesis is to address a fundamental question: what explains the nature and scope of the observed disclosure regulation and enforcement in securities markets? The first chapter asks the question: why is it desirable to have disclosure regulation even when sellers of the securities (fi rms) can credibly and voluntarily disclose information? A theoretical model is developed to show that a law that mandates disclosure of unfavorable events reduces socially excessive voluntary disclosures when the credible disclosure is costly (e.g., veri fication cost). Absent the optimal mandatory disclosure, firms haveincentives to disclose too much because non-disclosure is perceived to be bad news. The e fficient law takes the form of a threshold such that only unfavorable events are subject to mandatory disclosure. Both the voluntary and effi cient mandatory disclosure increase when information is more precise, or when disclosure costs decrease. Hence, we should expect a positive association between mandatory disclosure and voluntary disclosure from a cross-sectional perspective. The threshold-type regulation is also consistent with various observed accounting standards (e.g., asset impairment). The second chapter extends the theory in the first chapter by considering various environments in which information per se has real eff ects (social value). The settings considered include (i) information can facilitate optimal post-sale decision making by the buyers, (ii) information can facilitate optimal liquidation of assets, and (iii) information can prevent market break-down in a market for lemons . The optimality of the thresholdtyperegulation is robust in those settings. The model thus provides a coherent framework to understand the information environment in securities markets with various insightswhich are not available in models with the provision of information being exogenous or the mandatory disclosure and voluntary disclosure being considered independently.The rst two chapters examine the disclosure regulation problems while assuming away the enforcement problem (disclosure is truthful although costly). The third chapter develops a positive theory of regulatory enforcement in a multi- rm setting where enforcement and investments are jointly determined by economic fundamentals. The purpose of this theory is to explain (i) why enforcement of securities laws varies signi ficantly across jurisdictions,and (ii) why there is a positive association between enforcement intensity and capital market development. By extending the classic problem that a public agency cannotcommit to any long-term policy (Kydland and Prescott, 1977) to a heterogeneous-agent setting in which entrepreneurs' private information of their heterogeneous projects serves as correlated signals of the aggregate state of the economy, the theory explains how thediscretionary enforcement policy induces a coordination problem among entrepreneurs (fi rms) when making investment decisions. The model off ers a sharp characterization of the unique equilibrium of the "global game" in which the market can be either over-sized and over-regulated or under-sized and under-regulated depending on the primitives of the financial market. In addition to contributing to the extensive literature of accounting andlaw enforcement, the theory also adds to the macroeconomics theory by showing a novel mechanism through which a coordination problem can arise in economic development.