As traders around the world demand more detailed as well as timely information,voluntary disclosure levels are increasing in both highly developed and emerging-market countries. It is widely recognized, however, which financial reporting can be an unfinished mechanism for communicating with outdoors investors when managers’ incentives aren't perfectly aligned with the pursuits of all shareholders. In one traditional paper, the authors reason that managers’ communication with outside traders is imperfect when(1) managers have superior information about their firm, (2) managers’ incentives are not perfectly aligned with the interests of all the shareholders, and (3) accounting rules and auditing are imperfect. The authors state that getting mechanisms (such as compensation connecting managers’ rewards to long-term share worth) can reduce this conflict. Proof strongly indicates that corporate managers often have strong incentives to obstruct the disclosure of bad news, “manage” their own financial reports to co vey a morepositive image of the firm, and overstate their firm’s financial performance and prospects. For example, executives face significant risks of being dismissed in firms whose financial or stock market performance is relatively poor. Seriously stressed firms may have a higher risk of bankruptcy, acquisition, or hostile takeover, leading to a management change. Also, the possible competitive drawback created when proprietary details are made public may offset the advantages of full disclosure.
Regulation (e.grams., accounting and disclosure regulation) as well as third-party certification(e.g., auditing) can improve the functioning of markets. Accounting regulation attempts to reduce managers’ ability to record economic transactions in ways that are not in shareholders’ best interests. Disclosure regulation sets forth requirements to ensure that shareholders receive timely, complete, and accurate information. External auditors try to ensure that managers apply appropriate accounting policies, make reasonable accounting estimates, maintain adequate accounting records and control systems, and provide the required disclosures in a timely manner. Although these mechanisms may strongly influence practice, managers occasionally conclude that the advantages of noncompliance with reporting requirements (at the.g., a higher stock cost due to inflated earnings) over-shadow the costs (e.g., the chance of job loss and lawsuit resulting in criminal or municipal penalties if the noncompliance is discovered and eported). Thus, managers’ disclosure options reflect the combined results of disclosure requirements and their incentives to reveal information voluntarily.
