The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions

Under GAAP, SEC and exchange listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers' obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is often disclosed because of an underlying duty to disclose. Our empirical tests isolating the impact of materiality on firms' disclosures have greater explanatory power over empirical tests that do not. Voluntary disclosure incentives better explain disclosure when the information is less likely to be material. Tests of voluntary disclosure theories ignoring materiality likely lead to incorrect inferences.