Enforcement and Managers’ Collective Preference Toward Mandatory Disclosure

This paper examines the relation between enforcement and managers' collective preference toward mandatory disclosure. In the model, informed managers collectively determine the disclosure threshold of an asymmetric disclosure rule that becomes mandatory for all firms. Thereby, managers focus on maximizing their firms' short-term market price. We relax the conventional assumption of perfect enforcement and managers face a positive probability that non-compliant disclosure behavior remains undetected while a detection leads to a regulatory penalty depending on the severity of misconduct. The analysis of the model shows that enforcement, apart from inducing compliant behavior, aligns preferences of low and high quality firms if low quality firms still have incentives to be non-compliant. In this case, low quality firms withhold private information while forming a coalition with high quality firms advocating for more extensive mandatory disclosure rules that affect all firms. Based on this finding, tighter enforcement results in a collective preference toward more extensive mandatory disclosure. The positive relation largely persists when the mandatory and the voluntary disclosure threshold are endogenously determined