Is Silence Golden? Real Effects of Mandatory Disclosure

Mandatory disclosure provides benefits, but it also entails costs. One cost concerns managerial learning: by discouraging informed trading, disclosure could reduce managers’ ability to glean decision-relevant information from prices. Using mandatory segment reporting in the United States, we uncover a reduction in investment-|q| sensitivity, indicating lower investment efficiency after regulation. Consistent with learning, lower sensitivity is concentrated in firms with more informed trading and lower financing constraints. Constrained firms exhibit no change in investment-|q| sensitivity, suggesting that they enjoy countervailing benefits via greater financing and stronger governance. Overall, we document a novel link between mandatory disclosure and real effects. Received October 25, 2017; editorial decision June 20, 2018 by Editor Wei Jiang.