Mandatory vs. Voluntary Disclosures: The Cases of Financial and Real Externalities

This paper compares the disclosures firms would seek to make voluntarily with "optimal" mandated disclosures in a single period, multi-firm model, in which there are covariances between firms' cash flows. This comparison is important because, in those circumstances in which the two types of disclosure coincide, it is possible to economize on the process of setting mandatory disclosures. The principal factors which contribute to the existence or absence of a correspondence between mandatory and voluntary disclosures are (1) the nature of the externality associated with a firm's disclosure, (2) the relation between the risk preferences of the shareholders of the firms making the disclosures and outside investors, (3) how much relative weight is placed on existing shareholders and outside investors' preferences in the social welfare function determining the optimal mandatory disclosure policy, and (4) the covariance structure between firms' cash flows.