The Role of the Manager's Human Capital in Mandatory and Voluntary Disclosures

This paper analyzes voluntary disclosure equilibria by modifying Nagar's (1999) model and including the effect of mandatory disclosures on his model. We consider mandatory disclosures' effect in triggering investors' information search and in motivating managers to make voluntary disclosures. Our extended model demonstrates that managers have more incentives to disclose private information to the capital market than Nagar's model indicates, which means the managerial disclosure agency problem is mitigated by the interaction between mandatory and voluntary disclosures. Moreover, our model yields additional disclosure equilibria that differ significantly from the equilibria in Nagar (1999): incorporating both self-effect and induced effect on the voluntary disclosure strategy rules out a full-disclosure equilibrium when the investors have no private information. Finally, the likelihood that managers will provide voluntary disclosures is positively related to the quality of both the mandatory and voluntary disclosures. Therefore, this study has policy implications in view of recent calls for regulating the disclosures in press releases related to earnings and setting up good accounting systems that provide managers with more appropriate measures of firm-specific assets.