Increased Compensation Costs : an Externality of Mandatory

A debate opposes many accounting, finance, and economics researchers on investors’ need for disclosure regulation. Indeed, Healy and Palepu (2001) note that extent theory on voluntary disclosure shows that, absent market imperfections or externalities, firm managers have incentives to optimally trade off the costs and benefits of voluntary disclosure and to provide the efficient level of information for investors in the economy. Admati & Pfleiderer (2000) summarize well the viewpoint of researchers who do not believe that disclosure regulation favors investors by asking: “If disclosure is good, why don’t firms do it voluntarily?”