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Velashani, Mohammad Ali Bagherpour; ArabSalehi, Mehdi --- "Benefits of telling all - Voluntary disclosure" [2008] MonashBusRw 37; (2008) 4(2) Monash Business Review 7

Benefits of telling all
Voluntary disclosure

Problems such as information asymmetry and agency conflicts can impede the efficient allocation of resources in a capital market economy because buyers may find it difficult to differentiate the quality of certain products. If potential investors remain uninformed about a firms’ future cash flow, they may end up with a ‘lemon’.

Disclosure regulations and institutions such as auditors and capital market intermediaries established to facilitate and enhance the credibility of management disclosures, play an important role in mitigating these problems.

Corporate disclosure is critical for a capital market to function efficiently. Some firms supplement this disclosure with voluntary communication, such as management forecasts, analysts’ presentations and conference calls, press releases, internet sites and other corporate reports. Also, there are disclosures about firms by information intermediaries, such as financial analysts, industry experts and the financial press.

The main argument of this paper is that disclosures, especially voluntarily environmental disclosures, have economic benefits for companies.

By providing this kind of disclosure to the market, quality firms runs less risk in having their shares underpriced by investors.

Literature on voluntary disclosures suggests that the economic benefits that derive from these disclosures are the driving reason behind companies making them. There has been increasing environmental awareness and expectations regarding the activities of companies that may bring many potential legal and economic risks for companies. Capital markets are ever more responsive to these matters. There has been an increase in the number of the moral (ethical) investors who believe that they should avoid investing in certain types of companies which cause social injury or environmental damage. Also increased stringent sanctions against certain types of corporate activities because of the public concerns have increased the risk of investment in them.

Regarding these issues, the rational firm (the firm which wants to maximise its shareholders’ welfare/reduce its costs of capital) voluntarily engages in the environmental protection activities (e.g. reducing pollution, reducing the use of natural resources and recycling previous products) and then communicates to its markets (product, labour and capital) its actions in these areas in order to differentiate itself and thereby maximise its wealth.

Thus, voluntary disclosure has, in the main, inherent economic benefits for companies.

To view this academic paper in full, see www.buseco.monash.edu.au/industry

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About the authors

Mohammad Ali Bagherpour Velashani

Mehdi ArabSalehi