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Microstructure of Firms' Disclosure

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  • Tzur, Joseph
  • Yaari, Varda

Abstract

Because of imperfections in auditing technology, firms can successfully misrepresent financial reports. We offer a new mechanism, a "sunshine rule," by which firms are required to publicize a management draft prior to the audited reports. If the final reports are materially different from the management's draft, the market penalizes both the firm and the manager. The proposal's effectiveness in eliminating "earnings management," increasing the quality of the financial reports, and reducing the cost of the manager's incentives is illustrated in signaling games with perfect and imperfect information and a principal-agent model with perfect information. Copyright 1999 by Kluwer Academic Publishers

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  • Tzur, Joseph & Yaari, Varda, 1999. "Microstructure of Firms' Disclosure," Review of Quantitative Finance and Accounting, Springer, vol. 13(4), pages 367-391, December.
    • Handle: RePEc:kap:rqfnac:v:13:y:1999:i:4:p:367-91
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    Cited by:

    1. Adam Ostaszewski & Miles Gietzmann, 2008. "Value creation with Dye’s disclosure option: optimal risk-shielding with an upper tailed disclosure strategy," Review of Quantitative Finance and Accounting, Springer, vol. 31(1), pages 1-27, July.

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