The information asymmetry effects and a conceptual framework of enhanced mandatory disclosures

I study the information asymmetry effects of enhanced mandatory disclosure by incorporating the inherent differences between institutional and individual investors into an information model. In the model, I characterize the information asymmetry to originate from the fact that some investors possess private information ex-ante mandatory public disclosure. I show that enhanced mandatory disclosure does not always result in leveled informational playing field and reduced information asymmetry. Specifically, I show how the relative characteristics of mandatory disclosure and ex-ante private information systems (complementary versus substitute nature of the information signals they generate), affect the extent of ex-post information asymmetry between individual and institutional investors. Drawing on the findings and predictions of the model, I present a conceptual framework of classifying accounting standards and disclosure requirements in a spectrum from 'substitute' to 'complementary' based on their objectives and information properties at the time of pronouncement and on the nature of their relationship with the ex-ante private information. Finally, I discuss the empirical implications of such classification scheme, which is based on the model's findings.