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Is Silence Golden? Real Effects of Mandatory Disclosure

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  • Sudarshan Jayaraman
  • Joanna Shuang Wu

Abstract

Mandatory disclosure provides benefits, but it also entails costs. One cost concerns managerial learning: by discouraging informed trading, disclosure could reduce managers’ ability to glean decision-relevant information from prices. Using mandatory segment reporting in the United States, we uncover a reduction in investment-$q$ sensitivity, indicating lower investment efficiency after regulation. Consistent with learning, lower sensitivity is concentrated in firms with more informed trading and lower financing constraints. Constrained firms exhibit no change in investment-$q$ sensitivity, suggesting that they enjoy countervailing benefits via greater financing and stronger governance. Overall, we document a novel link between mandatory disclosure and real effects. Received October 25, 2017; editorial decision June 20, 2018 by Editor Wei Jiang.

Suggested Citation

  • Sudarshan Jayaraman & Joanna Shuang Wu, 2019. "Is Silence Golden? Real Effects of Mandatory Disclosure," The Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2225-2259.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:6:p:2225-2259.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy088
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