Real Effects of Voluntary Disclosure: Evidence from Private Firm Financing

• In Event: Social and Monitoring Roles of Disclosure

Abstract

We investigate private borrowers’ incentives to publicly disclose financial information in loan agreements in anticipation of public equity or debt issuance. Borrowers are 22.7% more likely to disclose sales and key financial ratios in the three years prior to public issuance. These voluntary disclosures reduce lender hold-up, reduce financing costs and increase public bond and equity issuance amounts by 9.9% and 12.2%, respectively. We show that our results are unlikely to be driven by selection on unobservable borrower quality. Overall, this evidence suggests that voluntary disclosure can mitigate information asymmetry and reduce financial constraints for young firms.

Authors

• Stephen Adam Karolyi, Carnegie Mellon University

• Thomas Ruchti, Carnegie Mellon University

• Andrew Bird, Carnegie Mellon University