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The Analysis of Accounting Information Disclosure in Capital Market From the Perspective of Microeconomics

Chen Yiwei1, Hu Ping2, Du Jingjing3, Zhang Tianliang4

(1. School of Law and Political, Zhejiang A & F University, Hangzhou, Zhejiang 311300, China; 2. South China Business College, Guangdong University of Foreign Studies, Guangzhou, Guangdong 510545, China; 3. Institute of Foreign Languages, Yanshan Unversity, Qinghuangdao, Hebei 066004, China; 4. School of Economics and Management, Zhejiang A & F University, Hangzhou, Zhejiang 311300, China)

Abstract: This thesis has analyzed the motivation for voluntary disclosure of financial information in the capital market, the advantages and drawbacks of mandatory disclosure of enterprises’ accounting information by the government or the relevant departments, and an effective way to combine these two aspects to appropriately disclose information. The conclusion has been reached based on a large number of previous studies that the motivation for enterprises to voluntarily disclose their financial information consists of three aspects: agency theory, signal theory and the competitiveness, which is the essence of the market. The policy of mandatory disclosure of accounting information intends to avoid the invalidity of “invisible hand” which could cause many unnecessary problems such as the withholding of necessary accounting information, or the whopping price for bootlegged information, resulting from the contradiction between the whole market and the society. Therefore, the capital market can’t follow a sound and ordered development without the effective combination of two kinds of disclosure. This thesis mainly studies how to effectively combine these two kinds of disclosure.
Key words: Accounting information; Voluntariness; Mandatory property; Disclosure
 

Although there are many drawbacks in mandatory disclosure, it is still quite popular in accounting information disclosure, and even seen as a world-dominant method. However, some economists start to professionally question it. The thesis mainly analyses the advantages and disadvantages of the voluntary and mandatory disclosure by using the theory of microeconomics so as to have a better under- standing of the goal as well as the essence of accounting disclosure.
The elaboration of motivation and theoretical analysis
The analysis of Agency Theory
The Agency Theory is one of the important reasons for executives to voluntarily disclose their financial reports, while the principal-agent relations, as the most important relationship, reflects the relationship between administrator and product owner, with the contract as its external performance( Chen, 2004). The covenant, with accounting information as its main content, represents the rights and obligations between the client and mandatory, indicating the right of pursuing profit being transferred to enterprises by rational market participants. However, as the goal of clients is not always consistent and even contradicted with that of man dataries, the owner would spend some money on the supervision of the administrator’s performance. As a result, the core of Agency Theory is that the third party, the supervisor, would harm the interests of the mandatory. It is proposed in Agency Theory that the gains of the managers should be linked with that of the processors for the maximization of interests of executives, that is to say, some terms should be stipulated in the contract in hopes of encouraging executives to strive for the the maximization of interests of owners for their own interests. The executive would like to disclose his accounting reports voluntarily to reduce monitoring cost for owners for a good reputation, resulting in higher profits.
Signal principle and competitive nature of “the invisible hand”
With the development of the capital market, resources have become a factor that can’t be ignored. It comes to be one of reasons why information is voluntarily disclosed as it could determine enterprises’ competitiveness. Therefore, enterprises should improve the quality of their financial statements and voluntarily disclose information concerned by the outside world to improve the confidence of investors and enhance the enterprise’s value. It is also necessary for enterprise to attract foreign investment by doing so. The enterprises with good performance could maintain its credibility though voluntarily disclosing its information under the climate of recession. While, enterprises with general performance will also hire some experts or CPA to make a good financial statement which could show their high competitiveness. What is more, a good financial statement is a matter of success or failure for companies with a relatively weak comprehensive strength. A financial statement not only shows the advantages and disadvantages of a company but allow the investors to know the potential of the enterprise and to guide enterprises to improve themselves.
Private Contact Theory
Some scholars believe that internal financial information can be seen as a commodity, because it has both commodity value and use value, and its production cost is not so high as that of other items. Therefore, the US economist Harry Walker has proposed that the financial market should not be limited to financial products and it should also include information products. Individuals personally purchasing investment newsletter is a good illustration of Private Contract Theory.
The Benefits and drawbacks of the policy of mandatory disclosure of accounting information
The motivation for the policy of mandatory disclosure of accounting information is mainly from two aspects. On the one hand, this policy can prevent the market- “the invisible hand” from inefficiently regulating economy, as a result, the government is required to promote the rational use of funds in the community, in other words, the  investors’ capital should be “maximization of marginal utility” so as to avoid  monopoly or withholding of important information. Secondly, there is a necessity of mandatory disclosure to make information fully transmitted in the market, as the market may be contrary to the goal of social needs during the operation process.
Market failure
Market failure has led market participants either to make a choice that is not conducive to their own interests or immoral to society by taking advantage of information. Therefore, it’s of great importance for the government, i.e. the visible hand, to make a macro-control and supervision of the market, in order to mitigate the negative impact of market failures. The core of regulation lies in the fact that accounting information has the commodity features of value and use value, which is the exclusive property of the enterprise, as well as the function of public welfare.
Enterprise is the Exclusive provider of information.
The theory of “invisible hand” could be used to analyze the failures of information transactions. It can be partly attributed to potential monopoly of internal accounting information of enterprises. Without the government’s oversight and intervention, it would probably lead to market failure (Yang, 2007). Liu Xin, a teacher in Changchun University, proposes that compared with the private contractual purchasing behavior, the policy of mandatory disclosure of financial statement could avoid market failure brought by price monopoly, resulting in a better social effect. In short, the mandatory disclosure of accounting information could reduce the investment cost for market participants, as the accounting information could be sold as a product of the enterprise, whose exclusive producer and provider is the enterprise. It is a waste of money buying similar information.
Accounting information is considered as public product.
According to “Adams Pareto Optimal”, accounting information would become a typical public product provided that perfectly competitive market existed(Chen, 2006). Besides, it is inevitable that market participants would pursue their own share of the profits. All these would lead to the inefficiency of enterprise information production, contributing to the result of demand exceeding supply. However, the relationship of accounting information between supply and demand in the market does not manifest themselves authentically, which has become a focal point for discussion among many scholars and also opened a window for government to intervene the market economy. Undoubtedly, if the government planned to cover the cost of accounting information production through financial subsidies, it’s the whole society that must take responsibility for the subsidies. Therefore, it is imperative that the government should take mandatory measures.
Analysis of social goals
If a failure appeared in the realization of the overall objective of society, the participants in the financial market would always keep focusing on the accurate definition of “Fair Report” as well as the specific theories and practical problems of the protection of market participants (Chen, 2006). Based on common interests, the fairness of the market highlights the opportunity of equally access to information for each market participant, i.e. “the information symmetry”. From the government’s point of view, there is still a long way to go to strive for this goal. “The unwise choice” or “unconscionable action”, resulted from the asymmetric information obtained by market participants, which is unrealistic and hard to carry out in a short period, would finally be resulted in a potential high market risk, leading to the collapse of market. Thus mandatory disclosure is a guarantee of “information symmetry”, and it could effectively prevent carpetbaggers from taking advantage of the internal information for their own sake, and also ensure long-term confidence in the fairness of the market for investors.
The Similarities and differences between the two disclosure methods and their conjunction point
The reason why the disclosure of accounting information should be strictly required is that with the gradual development of capital market and our global village becoming smaller and smaller, economic development can no longer be confined to one country and globalization and multiplicity are becoming more and more influential, leading to fierce commercial competition in capital (Yu, 2006). Thus the demand for accounting information would also increase; some information which an enterprise is unwilling to disclose could be sold to those investors in need at fixed price. It is conducive to increase shareholders’ desire to purchase financial products and derivatives, contributing to enhancing the company value (Cui, 2006). Meanwhile, Voluntary disclosure of financial information could also promote reform and innovation of the financial derivatives, the transfer of financial instruments and the innovation of signal derivative products, as well as encourage supervision and regulation departments to make appropriate policies. However, the negative impacts brought by the voluntary disclosure of financial information should by on means be ignored. On the one hand, compared with the overall revenue of the macro-economy, the cost produced by financial disclosure is supposed to beard by the enterprises themselves; in addition, the excessive disclosure of accounting information make the leak of commercial secret possible, which could have negative impact on enterprise.         The fact that enterprise is excusive to the production and sale of accounting information is one of the reasons why mandatory disclosure of accounting information is highly required, and also indicates the failure of invisible hand. The government requires enterprises who are the exclusive producer and seller of the accounting information to carry out a certain amount of mandatory disclosure, which could to some extent reduce the cost in purchasing information for the market participants. The essence of the market economy is the competition among the various manufacturers driven by the desire of profit, providing motivation for the possibility of misleading reports, at least in a short time. In other words, it’s impossible to blame executives for disclosing misleading financial accounting reports, at least in the short time, consequently they can manipulate the financial reports within limited time. That is why mandatory disclosure is essential to market participants, for it could ensure of fairness and transparency of information to some degree, guaranteeing the rational allocation of social resources and the output maximization of utility(Fang, 2013). Of course, corporate financial information may show its own disadvantages during mandatory disclosure, for if the financial information, as a kind of public product, is oversupplied, it could lead to the over-centralization of wealth on enterprises or on the financial information users, imposing the burden on the whole society.
From the perspective of “game theory” in microeconomics, the disclosure of financial information itself is a kind of game play. However, the two characteristics of corporate financial reports are incompatible on the surface, but are intertwined with each other in reality, and the high quality of financial statement is the necessary and sufficient conditions for all normal economic activities no matter what kinds of disclosure method are adopted, while mandatory and voluntaries are purely two extremes (e.g., liu, 2005; Zhu, 2005; Ren, 2013). It would undoubtedly be irrational if we see it as a game of multiple choices of selecting one from two, for each coin has its two sides(Yu, 2005). Thus these two characteristics are inseparable, and laking any of them, investors would be at high risk.
The disclosure of domestic financial information
In recent years, with the development of market economy, experts at home and abroad have put forward different views about the way of disclosing China’s corporate financial reports. Some advocate a mandatory accounting disclosure of accounting information merely, while some only prefer the voluntary disclosure. Chen Yiwei, a Master of Law and Politics in Zhejiang A&F University, holds that each way of disclosure has its own distinctive advantages and disadvantages, but as to the way of combining the two effectively, the consensus hasn’t been reached by domestic and foreign scholars. However, it’s necessary for us to jointly explore it to seek an appropriate way of accounting disclosure.
In-depth analysis of the two methods of disclosure
Efforts should be made to explore the possible binding sites of the content of two methods.
The content of mandatory disclosure of accounting information as required by the government or other related departments are the major changes taking place in the business management and the information related to the change of shareholders’ rights and obligations and benefits. It is due to the investors’ interest and social responsibility that the companies take the initiative to disclose their own operating environment, strategic planning and the status of management affecting investment decisions. Therefore, some scholars believe that executives shall not bear their legal responsibility for the loss that is caused by companies’ unintentional inaccurate information.
Governments and investors should aware the significance of raising the minimum standards of mandatory disclosure of accounting information
It is undeniable that the central government meet many challenges when carrying out the policy of mandatory disclosure of financial statement., as a great large number of companies disclosed their financial statement in accordance with the existing minimum standard, what is more, most companies, when taking industrial competition into consideration, are reluctant to voluntarily disclose their financial statement. Some scholars believe that a voluntary disclosure of financial statement is a means of attracting investors and it can only be used as a reference for investors. A company shall not take their responsibility for disclosing such information as the future potential of the company, the development of core business and its overall strength. 
“Creation-Information disclosure regulation model” is used in the essay. There is a theory that the function of the disclosed date of accounting information is not successive, because of the intrinsic value existing in the economic scale information itself (Liao, 2006). As little information is almost of no value, enterprises would not be likely to disclose their accounting information. Besides, the threshold set by the government is too low to reach the minimum standard of voluntary disclosure of accounting information, and only the standard of mandatory disclosure of accounting information reaches or even excesses that threshold. This threshold can be improved by appropriately increasing financial disclosure information times as well as improving the minimum standards of mandatory disclosure. Only these theory putting into practice can the problem of point combination of this two disclosure methods be settled (Qiu, 2011). As a result, the asymmetric information of market participators could thus be solved, which is beneficial to maintain the confidence of investors in market and enterprises.
Exploring a way for mandatory disclosure of internal information to meet or exceed the threshold of appropriate disclosure
Liu Xin, a teacher in School of Economics of Changchun University, conducted a research about the definition the reasonable mandatory disclosure of corporate financial reporting in the Changchun urban areas of Jilin Province, and how to explore an effective way of combining the mandatory and voluntary disclosure of accounting information for enterprises to accept. The way to be exploited is a balance reached by the invisible hand between during the process of achieving a market goal, and its appropriateness is visible and controllable. It is inevitable that enterprises will disclose more and more accounting information with the increasingly developed modern market, and investors could take advantage of and select the disclosed information in a planned way.
The author holds that mandatory disclosure shall take into account the comprehensive consumption of cost because of the implement of mandatory disclosure form the perspective of cost and benefit, which includes the establishment of inspection services, as well as consumption of the implement of policy, the cost for  changes in enterprise operational mode, the spending in dealing with enterprise irregularity, and the loss of opportunity cost of attracting investors resulting from the excessive disclosure of information (Cai, 2010). A phenomenon of putting the cart before the horse would occur itself when the government carries out regulation of the enterprise’s accounting information, i.e. only paying attention to the benefits of executives bought by supervision, regardless of negative impact on companies (Yang, 2009). If the supervisor only want to maximize his own rights and don’t care bout whether the amount of information is appropriate or not, this behavior is equal to the corruption. Therefore, the way that profit should keep up with justice is the only correct choice for us to the disclosure of information
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The diagram of mandatory disclosure under the deferent disclosure degree 
The axes Q-L represents the trajectory of supervision on enterprises accounting information; the utility function of supervision department resulting from its mandatory disclosure could be showed by U1, and its corresponding point in Axis L is L1. U2 is the Indifferent Curve of social utility brought by the disclosure of accounting information, with the line of LORE cutting at point L2. Thus it is naturally concluded that there is no direct correlation between the utility bringing to the supervisors and the practical social utility function caused by the information disclosure itself, which also explains why the mandatory disclosure is L2-L1 when the critical point of disclosure is L1.
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