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Mandatory Disclosures as a Principal-Agent Paradigm

In: Mandatory Financial Disclosures and the Banking Sector

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  • Kumar Dasgupta

    (University of Cambridge)

Abstract

In this chapter, I approach mandatory disclosures from a regulatory perspective and provide an explanation that is based on the optimality of regulatory contract in the presence of information asymmetry between regulators and the firms. I set up a principal-agent (PA) framework in which a regulator is the principal and a company that has to comply with such regulations (and incur a cost) is the Agent. The objective of the principal (i.e., the regulator) is to design an optimal incentive contract that would make the agent (i.e., the firm) act in line with regulatory objectives even when such objectives are in conflict. I demonstrate, using the PA framework, that the regulator will always require the firm to provide information on his/her actions even at the optimum. By positing an explanation that puts information at its core, the approach developed in this chapter, in addition to expanding our understanding of mandatory disclosures, opens possibilities for further investigating how such disclosures and the processes employed for their creation can be optimised in an economy.

Suggested Citation

  • Kumar Dasgupta, 2023. "Mandatory Disclosures as a Principal-Agent Paradigm," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Mandatory Financial Disclosures and the Banking Sector, chapter 0, pages 23-47, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-031-37212-4_3
    DOI: 10.1007/978-3-031-37212-4_3
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