Information Externalities of Disclosure Regulation: Evidence from SFAS 161

• In Event: Securities Regulation - I

Abstract

Understanding information externalities is important in the evaluation of mandatory disclosure. We provide evidence of information externalities from a recent disclosure regulation—SFAS 161—which requires reporting detailed effects of derivatives on financial statements and other important aspects. Using a large sample of non-users of derivatives (thus, unaffected by the mandate), we find an increase in stock liquidity after their critical customers expand disclosures under the regulation. The increase in stock liquidity is more salient for firms that depend more on affected customers, for more opaque firms, and for firms whose customers experience greater improvements in disclosures of derivatives. These findings identify positive externalities of mandatory disclosure which individual reporting firms have few incentives to achieve voluntarily.

Authors

• Jing Chen, University at Buffalo, SUNY

• Yiwei Dou, New York University Stern School of Business

• Youli Zou, George Washington University