Is Silence Golden? Real Effects of Mandatory Disclosure

TLDR

Mandatory disclosure offers benefits but can hinder managerial learning by reducing the ability to glean decision‑relevant information from prices. The study finds that mandatory segment reporting reduces investment‑q sensitivity, lowering investment efficiency, especially in firms with high informed trading and low financing constraints, while constrained firms show no change, revealing a novel link between disclosure and real effects. Received October 25, 2017; editorial decision June 20, 2018 by Editor Wei Jiang.

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.