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«ABSTRACT Regulatory transparency—mandatory disclosure of information by private or public institutions with a regulatory intent—has become an ...»

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While some economists have questioned the need for mandated financial transparency systems and their effectiveness (Stigler, 1964; Benston, 1973), a growing literature suggests that financial reporting has been effective both in reducing investor risks and in improving corporate governance. Research suggests that financial reporting limits investors’ risks by reducing investment errors and reducing costs of identifying appropriate opportunities (Simon, 1989; Botosan, 1997), as well as by generally reducing information asymmetries between more and less sophisticated investors (Bushman & Smith, 2001; Greenstone, Oyer, & Vissing-Jorgensen, 2004; Ferrell, 2003). Public reporting reduces firms’ cost of capital (Botosan, 1997) and attracts the attention of analysts who may then recommend the stocks for purchase (Lang & Lundholm, 1996).

Reporting improves corporate governance by reducing information asymmetries between shareholders and managers, encouraging managerial discipline, reducing agency costs, supporting enforceable contracts, and disciplining corporate compensation (Bushman & Smith, 2001; Healy & Palepu, 2001; Ball, 2001).

Researchers have also found that foreign companies that switch to using more rigorous U.S. disclosure rules experience market benefits. Newly disclosed information reduces investor errors in achieving their investment goals and improves companies’ stock liquidity and access to capital, explaining why some foreign companies decide to adopt more transparent accounting standards (Leuz & Verrecchia, 2000). Comparative studies also have concluded that investors are less likely to buy stocks during financial crises in companies with relatively low transparency and that investors leave less transparent markets for more transparent ones (Gelos & Wei, 2002).

Restaurant Hygiene Quality Cards Publicly posted hygiene scores reduce search costs for consumers and provide restaurants with competitive incentives to improve. In Los Angeles, grades have become highly embedded in customers’ and restaurant managers’ existing decision processes. A restaurant’s grade is available when users need it, at the time when they make a decision about entering the establishment; where they need it, at the location where purchase of a meal will take place; and in a format that makes complex information quickly comprehensible (Fielding, Aguirre, Spear, & Frias, 1999). Grades promote comparison-shopping in situations where most consumers have real choices. Most important, the information tells consumers something that they want to know but did not know before—the comparative cleanliness of restaurants. Restaurant managers, accustomed to local health regulations, have both market and regulatory incentives to discern customers’ perceptions of food safety.

A comprehensive study of the Los Angeles transparency system suggests that the restaurant grading system has been highly effective (Jin & Leslie, 2003).

Researchers found significant effects in the form of revenue increases for restaurants with high grades and revenue decreases for C-graded restaurants. More important, they found measurable increases in hygiene quality and a consequent significant drop in hospitalizations due to food-related illnesses. Overall, more informed choices by consumers appear to have improved hygiene practices, rewarded restaurants with good grades, and generated economic incentives that stimulated competition among restaurants. A more recent study similarly con

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cludes that the restaurant grading system successfully reduced the number of foodborne disease hospitalizations in Los Angeles County (Simon, Leslie, Run, Jin, Reporter, Aguirre, & Fielding, 2005).

Mortgage Lending Reporting Under the Home Mortgage Disclosure Act, mandated information has become embedded in the decision processes of both information users and banks. National and local advocacy groups have used the information to advance their long-standing goal of reducing discrimination by financial institutions. They have compiled public cases against particular banks in specific communities and negotiated with those banks to improve their practices. Bank regulators, another significant group of users, have used their information to promote new rules to fight discrimination in credit access, monitor improvements in lending, and tighten enforcement.

It is important to note that this transparency system works synergistically with conventional regulations to promote fair lending. Under the Community Reinvestment Act, federal regulators use disclosed data as one factor in approving requests for bank mergers. This regulatory requirement creates added incentives for banks to respond to the demands of advocacy groups. It is interesting that some banks have employed government-mandated lending data to identify important new market opportunities in inner-city communities and now specialize in financial products specifically targeted at low-income clients.

Researchers have found that this transparency system contributed to increasing access to mortgage loans for blacks and minority groups during the 1990s (Joint Center for Housing Studies, 2002). Disclosures demonstrated that discrimination was a common practice and information helped spur regulatory action (Schafer & Ladd, 1981; Munnell, Tootell, Browne, & McEneaney, 1996). Financial institutions tended to improve their lending to meet communities’ needs prior to merger applications (Bostic, Mehran, Paulson, & Saidenberg, 2002). Furthermore, mandated transparency contributed to an increase in home ownership for all racial groups (Joint Center for Housing Studies, 2002; Bostic & Surette, 2001).

Moderately Effective Transparency Systems Three of the transparency policies—nutritional labeling, toxic pollution reporting, and disclosure of workplace hazards—have proven moderately effective. They are characterized by more limited changes in discloser behavior or by mixed responses that sometimes advance regulatory aims but sometimes frustrate them as well.

Nutritional Labeling Medical research has established that over-consumption of saturated fats, sugar, and salt increases risks of chronic illnesses, including heart disease, diabetes, and cancer. The new law required that nutritional labels be displayed on packaged foods, using standardized formats, metrics, and recommended consumption levels in order to promote comparability. However, this transparency system, available on every can of soup, candy bar, and box of cereal, is only moderately embedded in consumers’ decisions for several reasons. Many consumers do not consider nutritional information relevant to their purchasing goals. The scope of nutritional disclosure also excludes large areas of food (for example, there are no mandatory labeling requirements on fast food or restaurant meals, even though they make up Journal of Policy Analysis and Management DOI: 10.1002/pam Published on behalf of the Association for Public Policy Analysis and Management The Effectiveness of Regulatory Disclosure Policies / 171 roughly one-half of household food expenditures). Finally, although information on packaged foods is available when and where consumers need it, the label has not proven comprehensible to many consumers.

Research on the effectiveness of nutritional labeling also reveals the complexities of shoppers’ and food companies’ responses to this transparency system. Researchers have found that some consumers, especially those who are well educated and interested in health, have understood and responded to new information by changing purchasing habits while other groups, such as older consumers, have not changed their behavior in response to labels (Derby & Levy, 2001; Mathios, 2000). Consumers tend to over-emphasize fat content relative to total caloric intake when dieting (Derby & Levy, 2001; Garretson & Burton, 2000). Analyses suggest that food companies tried to anticipate consumers’ responses to nutritional labels and reacted strategically. Yet the responses of companies are only partially congruent with the aims of nutritional labeling policy. Most companies have continued to market traditional high-fat, highsodium, high-sugar products, sometimes adding more healthy ingredients such as fiber or introducing brand extensions of low-fat or low-sodium products, resulting at least in increased product choices (Moorman, 1998). But positive effects on public health are less clear. Americans reduced their fat consumption during the early 1990s but did not reduce total calorie consumption, leading to concerns about obesity (Derby & Levy, 2001). Per capita fat consumption increased markedly between 1997 and 2000 and sugar and calorie consumption continued to rise.

Toxics Release Reporting Initially enacted as a public “right to know” measure in 1986, the Toxics Release Inventory (TRI) requirement soon became viewed by regulators as one of the federal government’s most effective pollution-control measures. As soon as disclosure was required, executives of some major companies announced plans to reduce toxic pollution radically. Reported releases declined substantially during the next decade.

Nonetheless, data produced by the TRI remain minimally embedded in the decisions of most potential users of such information. Most homebuyers, renters, job seekers, consumers, and investors do not consider toxic chemical releases when they decide what neighborhood to live in, where to send children to school, where to work, or in what companies to buy stock. In contrast to experience with the transparency system for home-mortgage lending, advocacy groups have not for the most part incorporated toxic release data into their core strategies.

However, while information has remained relatively un-embedded in market transactions and community action, it did become quickly and strongly embedded in important regulatory and administrative processes, particularly in actions by Congress and federal regulators. Existing goals and decision processes made these officials highly responsive to the new information. Some had been urging stricter regulation of toxic chemicals for more than a decade and had been struggling with the lack of reliable information to support their efforts. Enforcement officials sought a basis for their actions. As a result, anticipated reputational and regulatory threats quickly embedded newly disclosed information into manufacturers’ routine decision processes. Some companies sought to reduce their emissions by engaging in pollution prevention strategies while others substituted chemicals or changed accounting practices in ways that improved reports without necessarily improving public health.

Researchers have suggested that the effectiveness of this transparency system has been more limited than it appears. National news coverage created time-limited investor responses (company stock prices declined) to the first round of disclosures

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of surprisingly high levels of toxic releases by many publicly traded companies (Hamilton, 1995; Konar & Cohen, 1997). In addition, firms with large amounts of toxic releases became more forthcoming in disclosing environmental data in their 10K SEC reports (Patten, 2002). There is, however, little evidence of long-term market response by potential users of the information. Data have had no apparent effect on housing prices and have not stimulated the expected community response to pressure polluters (Bui & Mayer, 2003).

On the other hand, initial responses by those involved in making new pollution rules—especially legislators, regulators, environmental groups, lobbyists—did help to strengthen incentives for companies to reduce toxic releases, in the form of stricter laws and regulations (Graham, 2002; Graham & Miller, 2001). Many targeted companies, especially those with national reputations to protect, made commitments for long-term reduction of toxic releases in response to the first disclosures of shocking information and took some specific actions to minimize releases.

But the effectiveness of these actions in reducing toxic pollution remains uncertain.

Researchers have found that some reported decreases reflected only changes in reporting procedures, substituted chemicals were not necessarily less toxic, and reported decreases and increases of releases varied widely by state, industry, and year (Bui, 2002; Graham & Miller, 2001).

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