Political Costs of Disclosure

• In Event: 6.02. Institutional Factors and Information Content

Abstract

The proprietary cost hypothesis predicts that political costs determine firms’ disclosure choices. The purpose of this study is to investigate whether political costs of disclosure exist. I vary firm disclosures using the promulgation of 118 FASB standards between 1972 and 2009 and measure political costs using a novel measure of firms’ regulatory burden. Using a time-varying difference-in-differences research design, I document that regulators increase firms’ regulatory burden following increases in firm disclosure. The association is stronger for FASB standards that reveal more, and more credible, firm information. I corroborate the assertion that regulatory burden is a proprietary cost of disclosure by documenting a negative association between firms’ regulatory burden and future cash flows, and identify a plausible mechanism: the negative impact of firms’ regulatory burden on firms’ investment efficiency. Results imply that the political costs of disclosure 1) exist and 2) lead to an underproduction of information in the economy.

Author

• David Godsell, University of Illinois at Urbana-Champaign