Regulatory and Voluntary Reporting Interactions under Solvency II

This study investigates the impact of mandatory disclosure on the equilibrium of voluntary reporting and the information environment in capital markets. Solvency II introduces a regulatory reporting shock that provides standardized, market-consistent public disclosures, although not primarily designed for investors. Using a difference-in-differences design comparing insurers subject to Solvency II with those outside the regime, we document that mandatory disclosure crowds out voluntary Embedded Value (EV) reporting, consistent with theories predicting substitution when mandatory transparency reduces the incremental benefits of voluntary disclosure. We further show that Solvency II enhances capital market transparency by reducing information asymmetry. The effect is concentrated among insurers who do not issue EV reports, whereas for EV reporters, liquidity improvements are weaker and insignificant. Finally, Solvency II disclosures are strongly associated with equity prices, indicating that prudential regulatory information is value-relevant despite its non-capital-market orientation. Overall, mandatory disclosure reshapes voluntary reporting incentives and significantly alters insurers’ information environments.