How Does Financial‐Reporting Regulation Affect Industry‐Wide Resource Allocation?

Abstract

This paper examines the impact of mandatory reporting and auditing of firms’ financial statements on industry‐wide resource allocation. Using threshold‐induced variation in the share of mandated firms in a given industry, I document that reporting mandates facilitate ownership dispersion in capital markets and spur competition in product markets. I, however, do not find that reporting mandates unambiguously improve the efficiency of industry‐wide resource allocation. With respect to auditing mandates, I find only that they impose a fixed cost on firms, deterring smaller entrants.

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

“…Specifically, investors may prefer to reallocate their capital away from public firms either because the idiosyncratic disclosures of private firms reduce uncertainty and thereby reduce the private firms' cost of capital (French and Poterba (1991); Lang and Maffett (2011)), or because these disclosures can make investors more aware of private firms as viable investment options (Merton (1987)). 13 The possibility of these scenarios is bolstered by the fact that private firms tend to be small and/or transact with fewer stakeholders such that their disclosures might not generate useful information for other firms but rather remain more firm-specific in nature (Bushman, Piotroski, and Smith (2004); Breuer (2021)).…”

“…Key to informing this debate is understanding the potential spillover effects of these disclosures (Leuz and Wysocki (2016)). While emerging research has made progress in investigating both the determinants and firm-level costs and benefits of private firm disclosures, relatively little is known about the spillover effects of these disclosures (Bernard (2016); Breuer (2021)). 1,2 We extend this literature by examining an important but underexplored spillover effectwhether and how private firm disclosures impact investor demand for equity of their publicly traded peers.…”

“…We define private firm financial reporting transparency based on the granularity of disclosed financial statement information following the intuition inChen et al (2015). BvD collects financial statement information on public and private firms from their publicly available disclosures which are predominantly available through domestic business registers(Kalemli-Özcan et al (2019);Breuer (2021)). BvD then organizes the data in a standard financial statement format with consistent financial statement items labelled in English, following the most common financial reporting formats used in the European Union(Kalemli-Özcan et al (2019);Pinto Ribeiro et al (…”

Mandated Financial Reporting and Corporate Innovation

“…However, several recent studies provide evidence supporting the proprietary cost hypothesis (e.g., Verrecchia 1983). For example, Bernard (2016), Breuer (2020), and Glaeser and Omartian (2019) show that reporting mandates impose competitive costs on firms. Li et al (2017), Glaeser (2018), and Gassen and Muhn (2018), in turn, find that concerns about proprietary costs reduce firms' disclosures.…”

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

“…First, it extends the emerging literature on the economic consequences of private firm disclosures. While recent studies in this area highlight both the determinants and consequences of private firm disclosures, fewer studies have investigated the externality or aggregate effects of private firm disclosures (e.g., Breuer (2021)). We contribute to this underexplored area by showing that private firm disclosures have significant negative pecuniary externalities on the demand for public firm equity.…”