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Disclosure Requirements, Externalities And Corporate Resource Allocation Decisions

By Sri S. Sridhar, Robert P. Magee, Shyam Sundar and Konduru Shivaramakrishnan

Abstract

This paper demonstrates that, with prospective externalities such as those induced by joint-and-several liability, a disclosure requirement may promote or discourage efficient project choice depending on firms ’ beliefs about their future prospects and on the cost structures of alternative projects in their investment opportunity sets. We also characterize circumstances under which the disclosure requirement will have a positive effect on a firm’s stock price while reducing the likelihood of efficient project choice and vice versa. Further, we show that a recognition requirement may be constructed to resolve ambiguous disclosure effects. Requiring accrual of expected future costs above a threshold level promotes efficient project choice regardless of whether the impact of a disclosure requirement on efficient project choice would be favorable or not. Finally, we characterize conditions under which firms will prefer being exposed to such externalities to being shielded from them as in an individual liability regime.

Topics: Disclosure Requirements, Externalities And Corporate Resource Allocation Decisions
Year: 1998
OAI identifier: oai:CiteSeerX.psu:10.1.1.196.4623
Provided by: CiteSeerX
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