Disclosure, Initiative and Regulation

We present a model in which an entrepreneur who needs to raise funds in order to finance a project chooses what level of disclosure his firm will abide to. The disclosure level is assumed to make a proportion of the cash flows verifiable and hence functions as a mechanism for the entrepreneur to credibly commit not to expropriate investors. The model predicts that less than complete disclosure may be optimal if the entrepreneur’s initiative is valuable. If the entrepreneur is not the sole residual claimant then disclosure regulation will be welfare enhancing. If firms vary significantly in size then large firms that experience decreasing returns to scale will find it optimal to cross-list their shares in order to comply with stricter disclosure levels. This implies that having multiple disclosure levels within an economy is advatageous. Giving the manager a wage is not a perfect substitute for disclosure rules.