The Information Content of Mandatory Disclosures
The information quality of mandatory financial reporting depends on two factors: (1) Are standards appropriate to produce financial statements that provide investors with sufficient information? (2) Is compliance to standards enforced by appropriate institutions? This paper addresses the question if firms should be able to create hidden reserves as an example for the effect of standards on information quality. The analysis shows that rational investors are able to correctly decipher financial statements – independent of the standards in use. The question of sufficient enforcement proves to have a deeper impact on the quality of information.
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