Financial Constraints and Corporate Disclosure: Evidence from Capital Market Segmentation

40 Pages Posted: 26 Nov 2014 Last revised: 11 Dec 2015

See all articles by Rustom M. Irani

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

David Oesch

University of Zurich

Date Written: December 10, 2015

Abstract

The sharp distinction drawn between firms rated narrowly above (BBB-) and below (BB+) the investment-grade cutoff provides variation in debt financing availability unrelated to firm fundamentals. We exploit this market segmentation to identify an asymmetric effect of debt capital supply on voluntary disclosure: BB firms step up disclosure in response to high-yield bond mutual fund outflows. This effect is concentrated in periods of large fund outflows and among financially constrained firms. Conditional on greater disclosure, these firms increase equity issuance. Thus, disclosure may alleviate information-based financing frictions, allowing firms to smooth out temporary disruptions to the availability of finance.

Keywords: Financial Constraints; Asymmetric Information; Disclosure; Market Segmentation

JEL Classification: D82; G24; G32; M41

Suggested Citation

Irani, Rustom M. and Oesch, David, Financial Constraints and Corporate Disclosure: Evidence from Capital Market Segmentation (December 10, 2015). Available at SSRN: https://ssrn.com/abstract=2530613 or http://dx.doi.org/10.2139/ssrn.2530613

Rustom M. Irani (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Oesch

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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