Professor Xu Jiang explains how disclosure rules shape companies’ decisions, competition and the way investors process information.

Corporate disclosures include more than financial statements. Companies also share information about environmental, social and governance activities, product development and other issues that matter to investors, employees, customers and suppliers.

But deciding how much to disclose can be difficult: information that excites investors may also help competitors piece together a company’s strategy.

In this episode, Professor Xu Jiang of Duke University’s Fuqua School of Business discusses how mandatory and voluntary disclosure affect companies and their stakeholders. Regulators establish minimum requirements, but companies retain discretion over what they consider “material” and how much detail to provide. Pharmaceutical companies, for example, may use press releases to share progress on a drug before they can recognize related revenue in their financial statements.

The frequency of disclosure can also influence managerial decisions. If companies report earnings every quarter, managers may face pressure to meet analysts’ forecasts by cutting promising research and development projects. Reporting less frequently may reduce that pressure, but more frequent reporting can also help investors monitor managers and discourage them from using company resources for projects that do not benefit shareholders. “The important trade-offs are how would the disclosure affect the firm's real investment decisions, and how would that affect competitors' investments — which may in turn further affect the firms’ decisions,” Jiang said.

The way information is presented matters, too. Detailed disclosures may benefit institutional investors with the resources to analyze them, while making it harder for individual investors to find important information. In some cases, less detailed disclosures such as summaries may reduce this gap.

For MBA students and business leaders, Jiang emphasizes the importance of considering managers’ incentives and the long-term effects of disclosure rules. “Do not get easily fooled by the manager,” he said. Sometimes, improved earnings may reflect cost-cutting “that sacrifices the firm’s long-term future.”

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