How Does Financial-Reporting Regulation Affect Market-Wide Resource Allocation?

117 Pages Posted: 5 Nov 2017 Last revised: 15 Jul 2018

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2018

Abstract

I investigate the impact of mandatory reporting and auditing of firms’ financial statements on industry-wide resource allocation. Using size-based reporting and auditing requirements for limited liability firms in 26 European countries, I document reporting regulation, mandating a greater share of firms in an industry to disclose a full set of financial statements, fosters a competitive and dispersed type of resource allocation in product and capital markets, but does not unambiguously improve the efficiency of resource allocation. By contrast, I find auditing regulation, mandating a greater share of firms to obtain a financial-statement audit, imposes a net fixed cost of operating on firms, deterring entry of smaller firms. I do not find any other effects of auditing regulation on industry-wide resource allocation in my setting. My findings suggest reporting regulation substitutes a transactional type of resource allocation based on public information for a relational one based on private information. This substitution, however, fails to spur economic growth. With respect to firms’ auditing, my findings suggest it lacks significant industry-wide externalities compensating for firms’ costs of mandatory auditing.

Keywords: Financial-reporting regulation, Disclosure, Auditing, Competition, Resource Allocation

JEL Classification: K22, L51, M41, M42, M48, O43, O47

Suggested Citation

Breuer, Matthias, How Does Financial-Reporting Regulation Affect Market-Wide Resource Allocation? (July 1, 2018). Available at SSRN: https://ssrn.com/abstract=3063320 or http://dx.doi.org/10.2139/ssrn.3063320

Matthias Breuer (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
428
Abstract Views
1,691
rank
46,775
PlumX Metrics