How Does Financial-Reporting Regulation Affect Industry-wide Resource Allocation?

Abstract

This paper examines the impact of mandatory reporting and auditing of firms’ financial statements on industry-wide resource allocation. Using threshold-induced variation in the share of mandated firms in a given industry, I document that reporting mandates facilitate ownership dispersion in capital markets and spur competition in product markets. I, however, do not find that reporting mandates unambiguously improve the efficiency of industry-wide resource allocation. With respect to auditing mandates, I find only that they impose a fixed cost on firms, deterring smaller entrants.

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

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