Initial Public Offering Disclosure Rules and Information Production Incentives

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We show that, in an environment where information regarding firm quality is endogenously produced, mandatory disclosure can reduce the incentives of an issuer contemplating an initial public offering of common stock to produce information regarding the issuer's expected return. We consider the effect of three disclosure regimes (no disclosure, voluntary disclosure, and mandatory disclosure) on information production incentives. We find that the value of information may be positive, zero, or negative, depending on the disclosure regime, the cost of information, and issuer preferences. With endogenous issuer information production, a more rigorous disclosure standard may create a more opaque informational environment. We find that, regardless of the level of information costs, unless the amount of external financing required destroys signaling opportunities or information affects the investment decision, mandatory disclosure Pareto dominates the other disclosure environments.


asymmetric information; disclosure requirements; learning; value of information