Financial Constraints and Corporate Disclosure: Evidence from Capital Market Segmentation
40 Pages Posted: 26 Nov 2014 Last revised: 11 Dec 2015
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: Suggested Citation