Reporting and Disclosure
1. Transparent financial reporting means that timely and accurate disclosures are made on all important matters affecting a company’s financial position and performance. It implies openness, communication, and accountability. Transparent financial reporting protects investors because nothing is hidden from them. Investors can better assess the risks of owning securities when information is truthful and complete. Transparent financial reporting also improves market quality. It enhances investor confidence. Open communication creates markets that are fair, orderly, efficient, and free from abuse and misconduct.
Four reasons why multinational corporations are increasingly being held accountable to constituencies other than traditional investor groups: a. The development and growth of the influence of trade unions. b. The growing recognition of the view that those who are significantly affected by decisions made by institutions in general must be given the opportunity to influence those decisions. c. The rejection by many governments of classical economic premises such as the belief that the regulated pursuit of private gain maximizes society’s welfare. d. The increasing concern over the social and economic impact of multinational corporations in host countries.
Arguments in favor of equal disclosure include:
a. The absence of equal disclosure would create an unfair playing field for U.S. companies. Non-U.S. companies would have a competitive advantage in that they would not have to disclose the same information and so would not incur the costs involved in generating and publishing it. b. Investors in non-U.S. companies have the same information needs as those who invest in U.S. companies. A market concerned with investor protection would make sure that investors have timely and material information on all listed companies, not just those domiciled in the United States. c. Unequal disclosure might impede cross-company comparisons involving U.S. and non-U.S. companies.
Possible reasons against equal disclosure include:
a. The high cost of meeting equal disclosure requirements may deter foreign issuers from listing in the United States. b. The extra costs involved work against the benefits of listing to the foreign companies.
Evaluation of arguments: All of these arguments have merit. There is no unambiguously correct answer as to what disclosure requirements should be imposed on foreign issuers, and there has been a contentious debate on this subject in the United States in recent years. In practice, fairness arguments often carry great weight in public debate, even when objective economic analysis does not support them.
4. The simple answer is that mandatory disclosures are corporate disclosures made in response to regulatory requirements (for example, rules issued by national regulators or stock exchanges), and that voluntary disclosures are purely discretionary in nature. The distinction between mandatory and voluntary disclosures can be ambiguous in some settings, however. For example, the requirement that U.S. companies must file Form 10-Ks with the U.S. Securities and Exchange Commission is straightforward. However, measurement and disclosure approaches for some of the items in the Form 10-K are not. Similarly, there are widely divergent views concerning what types of press announcements are mandatory versus voluntary.
Two possible explanations for differences in managers’ voluntary disclosure practices are: (1) Managers in highly competitive industries may be less forthcoming than managers in less competitive industries due to the expected cost of releasing information of potential use to their competitors. (2) Managers are expected to be more forthcoming when there is good news to disclose, than when there is bad...
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