ACC 680: Disclosure Theory

The aim of this seminar-style course is to provide students with insights into analytical disclosure theory, one important stream of literature in accounting research. The course provides an overview into the various determinants that shape firms’ reporting decisions. The structure of the course follows along the evolution of research in disclosure theory: In his famous paper about the “Market for Lemons”, Akerlof (1970) predicts a collapse of markets as the result of information asymmetries between sellers and buyers. Building on that, Grossman and Hart (1980) set out the unraveling principle, describing that sellers (or firms) have a vested interest in establishing information symmetry to distinguish themselves from the anonymous, silent mass. These papers provide a basis for a comprehensive literature stream that analyzes the emergence of disclosure equilibria in various settings.

Learning outcomes
Students know the fundamental literature of disclosure theory. They understand the unraveling principle, its assumptions, and consequences for the disclosure behavior of firms. Furthermore, students are able to assess and discuss the setting, basic assumptions, and mechanisms of analytical disclosure models. Participants are able to formulate constructive criticism of disclosure models and to defend them.

Necessary prerequisites
Not taken ACC 675

Recommended prerequisites
Basic knowledge in game theory, preparation of provided literature

Forms of teaching and learningContact hoursIndependent study time
Lecture2 SWS9 SWS
Exercise class1 SWS5 SWS
ECTS credits6
Graded yes
Form of assessmentWritten Report (50%), presentation (50%)
Restricted admissionno
Further information
Performing lecturer
Prof. Dr. Dirk Simons
Prof. Dr. Dirk Simons
Frequency of offeringSpring semester
Duration of module 1 semester
Range of applicationM.Sc. MMM, M.Sc. WiPäd, M.Sc. VWL, M.Sc. Wirt. Inf., LL.M.
Preliminary course work
Program-specific Competency GoalsCG 2, CG 4
LiteratureThis course covers both some seminal and current papers in the disclosure theory area.
They include but not limited to:
Akerlof, G.A. (1970): The market for ‘lemons’: quality uncertainty and the market mechanism, QJoE, 84, pp. 488 – 500
Beyer, A. et al. (2010): The financial reporting environment: Review of the recent literature, Journal of Accounting and Economics, 50, pp. 296 – 343
Ebert, M., Simons, D., and Stecher, J. D. (2017). Discretionary aggregation. The ac- counting review, 92(1):73–91.
Grossman, S.J, Hart, O. (1980): Disclosure laws and takeover bids, JoF, 35, pp. 323–334
Jung, W.O., Kwon, Y.K. (1988): Disclosure when the market is unsure of information endowment of managers, JoAR, 26, pp. 146–153
Verrecchia, R. E. (1983). Discretionary disclosure. JoAE, 5, 179–194.
Course outlineThe information asymmetry between investors and firms could cause a market collapse. Thus, disclosure is in the firm’s best interest. This course consists of three major parts. In the first part we introduce the unraveling principle that can be considered as the starting point of disclosure theory. In the second part we consider papers that relax certain assumptions underlying the revelation principle. This means we consider conditions under which a full disclosure equilibrium, i.e., settings where every firm discloses, is replaced by a partial disclosure equilibrium, i.e., settings where subsets of firm disclose. In the third part we consider papers with more descriptive contexts and their implications for real-world disclosure.