This paper provides a framework to analyze voluntary and mandatory disclosure. Since improved disclosure reduces the entrepreneur's ability to extract private benefits, it secures funding for new investments, but also provides existing claimholders with a windfall gain. As a result, the entrepreneur may choose to forgo investment in favor of extracting more private benefits. A mandatory disclosure standard reduces inefficient extraction and increases investment efficiency. Although the optimal standard is higher than the entrepreneur's optimal choice, it can be less than complete in order not to deter investment. The model also shows that better legal shareholder protection goes together with higher disclosure standards and that harmonization of disclosure standards may be detrimental.
