Information Asymmetry And Information Disclosure Regulation

Resource allocation is a key function of market, and it is also the case for capital market. In the process of dedicating resource to those well-performed firms, information, especially accounting information, plays an important role in investor decision-making. However, capital market research shows that information asymmetry exists: managers always know more than outside investors and some investors are better informed than the others.Information asymmetry arises due to uncertainty, agency problem and public good nature of accounting information. Business changes, which have been happening since two decades ago, intensify information asymmetry. The existence of information asymmetry is a major concern to capital market regulators for it deteriorates both market efficiency and market equity. While cannot be eliminated, information asymmetry can be mitigated by disclosure. Hence information asymmetry reduction should be one potential starting point for a comprehensive regulation of disclosure.After a review of disclosure literature in western countries, it is found that quantity and relevance of disclosure content and timeliness of disclosure have negative relationship with information asymmetry while fair disclosure does not reduce information asymmetry although it is theoretically sound. Therefore, future regulation should focus on contents and timeliness of information disclosure.The author then discusses how to improve information disclosure in China in light of the above finding. The following suggestions are made: 1) establishing a whole set of frame of financial accounting concept; 2) developing a individual financial standards dealing with earning forecast; 3) improving the financial standard dealing with segment report; 4) enhancing the threshold of compulsory information disclosure; 5) establishing insider trading report mechanism.