A Model of Aggregate Reporting Quality

Abstract

We characterize firms’ aggregate reporting quality in an economy where a rational capital market as well as a regulator discipline firms’ reporting choices. When the regulator is resource constrained, multiple aggregate reporting choices are possible in equilibrium. This multiplicity is driven not just by the regulatory constraint, but also by how this constraint interacts with managerial incentives and the level of reporting discretion available to firms. These results obtain despite firms trying to signal their type through private voluntary activities such as dividends. This link between aggregate reporting and aggregate signaling activities is under-emphasized in the literature. The model’s results thus offer a way to jointly interpret empirical results on aggregate reporting, aggregate signaling, and underlying institutions.