Voluntary Disclosure and the Duty to Disclose

This paper evaluates firms' disclosure decisions when they have a duty to disclose the material information in their possession. We posit that that, even when mandatory disclosure requirements exist, and firms incur penalties when they are caught violating the requirements, firms engage in cost-benefit calculations in deciding whether to comply with the requirements. In this framework, the paper makes predictions regarding the dependence of a firm's equilibrium disclosure policy on various parameters of the model, including: the frequency the firm receives information, the threshold defining material information, the size of damage payments, the expected fraction of the firm's shares purchased while information is withheld, and the probability the firm is eventually detected having withheld material information. The paper concludes by establishing a robust relationship between a firm's equilibrium disclosure policy and its equilibrium investment level.