No. 85: Enforcement and disclosure

Abstract

Our model combines disclosure requirements and enforcement rules to analyze the impact of enforcement on firms’ reporting behavior. Starting from a voluntary disclosure model with stochastic information endowment, we add an asymmetric mandatory disclosure rule that requires firms with bad private information to disclose. Mandatory disclosure is subject to probabilistic enforcement, with expected fines increasing in a firm’s misconduct. In equilibrium, low-value firms disclose fearing enforcement, medium-value firms do not disclose (some legally others illegally), and high-value firms disclose voluntarily. More vigorous enforcement enlarges the set of compliant firms, increasing the non-disclosure price. In response, disclosing voluntarily becomes less beneficial. When the mandatory disclosure rule is endogenous, i.e., set according to the firms’ preferences, we identify a locally stable rule where no majority of firms prefers a marginal change of the current regulation. The preferred rule is unique and increases in enforcement intensity and in litigation strength.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.