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Wednesday, April 27, 2005

Should Financial Disclosures Be Mandatory?

This post from Don Boudreaux at Cafe Hayek examines whether a firm should be forced to disclose whether they outsource (off-shore?) their call centers. It gives a pretty good "slippery-slope" argument against the idea. Before I get to their argument, let me give one of my own:

Back at a previous school, the main classroom for the College of Business was next to a certain well-known coffee chain. So, I'd often run into students while getting my daily (or twice or thrice daily, depending on the day) StarCrack.

Once, I overheard two accounting students debating some accounting rule change that mandated a higher level of discolosure for all companies. They went back and forth as to why the regulation was a good thing or not. Most aggreed that it was. Then, they made the mistake of asking me what I thought (one of them was a previous student who recognized me). My view was that (above some minimal level), companies should be free to choose how much financial information they disclose. Here was my argument:

  • How much detail a company provides is observable at least to reasonably sophisticated investors
  • If a company chooses not to disclose much information, a rational assumption would be that the company has something to hide
  • So, the amount of disclosure serves as a signal of firm quality (in fact, even choosing not to disclose reveals information).
I don't know if they got it, but they at least humored me, since I'm supposed to know about theese things.

As for Don BeauDreaus's argument:

I answered by pointing out that requiring firms to reveal the physical location of their employees isnt really full disclosure. Its fuller disclosure, but it's far from full disclosure. And this distinction is relevant. There remain oodles of information about each company and its employees that is not explicitly revealed in the absence of legislation but which might well be relevant to some callers.

Here are some other things that many American consumers no doubt care about and that firms probably would not not reveal unless forced by government to do so:

- an employee's sexual orientation

- an employee's religious beliefs

- an employee's political beliefs

- an employees attitudes toward controversial matters such as abortion, euthanasia, and the death penalty

So why stop with requiring firms to reveal their employees
physical whereabouts? Why not also require firms explicitly to reveal to customers information on all of the above matters?

Click here for the whole piece.

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