The Benefits of Mandatory Disclosure: Evidence from Regulation S-X Article 11

Abstract

The SEC mandates disclosure of Article 11 pro forma financial statements (pro formas) for acquisitions that exceed one of three bright-line materiality thresholds. Motivated by two theories of mandated disclosure, I test whether pro formas improve analyst forecasts or mitigate incentive alignment problems. Using a fuzzy regression discontinuity design, I provide evidence that pro formas reduce post-acquisition forecast errors and improve target selection. The improvement in forecast accuracy (target selection) is concentrated in acquirers with low analyst following (acquisitions involving third-party advisors), suggesting that benefits to mandated pro forma disclosure depend on the pre-existing information environment.