Mandatory Operating Information Disclosure: A Double-Edged Sword for Stock Price Crash Risk

The mandatory disclosure of operating information has become a regulatory trend in many countries, aiming to enhance transparency and improve market efficiency. However, a recent study using the staggered implementation of the Industry Disclosure Guidelines of China (CIDG) as an exogenous shock provides valuable insights into the unintended consequences of such regulations. The study finds that mandating firms to disclose more operation-related information increases their stock price crash risk, contrary to regulators' expectations (Chang et al., 2022).

The increased crash risk after CIDG is due to delays in bad news disclosure and the strategic response of firm management. When faced with potential predation from competitors, executives may opt to conceal bad news related to operating activities instead of disclosing it. This strategic response can worsen the company's information environment by creating information asymmetry between insiders and outside investors (Bernard, 2016; Clinch & Verrecchia, 1997; Ellis et al., 2012; Verrecchia, 1983).

The effect of mandatory operating information disclosure on stock price crash risk is more pronounced when the treated firms possess more proprietary costs, face fiercer industry competition, or exhibit more complex operating activities. This suggests that the unintended consequences of such regulations may be more severe for companies operating in competitive environments or with complex business models.

Furthermore, the study indicates that the strategic response of executives to this regulation accounts for the heightened stock price crash risk following the CIDG. This finding highlights the importance of considering the potential strategic responses of company executives when implementing new disclosure regulations.

In conclusion, while mandatory operating information disclosure can have positive effects on a company's information environment, it can also lead to unintended consequences, such as increased stock price crash risk. Regulators should be aware of these potential risks and consider the specific context of the companies they regulate when designing new disclosure requirements. Investors should also be mindful of the potential strategic responses of company executives to mandatory disclosure regulations when assessing the risk profile of their investments.

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