Optimal design and consequences of financial disclosure regulation: a real options approach

Waters, James (2015): Optimal design and consequences of financial disclosure regulation: a real options approach.

Abstract

This paper examines the optimal design and consequences of financial disclosure regulation. Our model represents the regulation as creating a real option for an investor to delay investment until information is disclosed. We find conditions on investment opportunities that ensure that regulation raises or lowers investor profits. We also find that investment typically falls immediately after regulation, and that the long-term effects on investment and profits are distinct and depend on market characteristics. For parameters calibrated to the time around the Sarbanes-Oxley Act, we calculate the extent and period of disclosure to maximise individual investor profits. We calculate the optimal parameters for a two company market, show that company-specific regulation is profit maximising, and calculate the investor profit loss from having market-wide rather than company-specific regulations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial disclosure; regulation; real options; Sarbanes-Oxley
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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