Proprietary Costs of Mandatory Disclosure and the Decision to First Access the Public Market

Abstract

This study examines whether and how proprietary costs of mandatory disclosure influence a firm’s decision to first access the public bond market. First access to the public market implies a pre-commitment to mandatory disclosure. Both the industry-level and firm-level evidence suggest that an important economic determinant of the financing decision is proprietary costs of mandatory disclosure. More specifically, I characterize product markets where a firm’s marginal profit decreases (increases) in response to a rival’s increase in output as one where firms compete as strategic substitutes (complements). First, a larger proportion of firms in product markets characterized as “strategic complements” choose not to access the public bond market, which is consistent with the interpretation that firms in “strategic complements” prefer no pre-commitment to disclosure of proprietary information on firm-specific values. Second, when the potential cost of disclosing proprietary information on market-wide values is high, a larger proportion of firms in product markets characterized as “strategic substitutes” choose not to access the public bond market, which is consistent with the interpretation that firms in “strategic substitutes” prefer no pre-commitment to disclosure of market-wide values. Finally, in a given product market, more profitable firms are less likely to access the public bond market because they have economic incentives to avoid public disclosure in order to protect their abnormal profitability from competition.

Keywords: proprietary cost, private placements, public offerings, mandatory disclosure requirements, product market competition, strategic substitutes, strategic complements

JEL Classification: M41, G32, G38