What Happens If Private Accounting Information Becomes Public? The Effect of Small Firms’ Mandatory Public Disclosure on Their Access to Bank Debt

Abstract

This paper exhibits the effect of private accounting information becoming public on small private firms’ access to bank debt. Both, proprietary cost of disclosure as well as relationship banking seem to historically have contributed to German private firms not voluntarily disclosing their financial statements. Employing a regulatory change, which increased enforcement and initially established fines for firms that do not publicly disclose their financial statements, we hypothesize and find that small private firms’ access to bank debt significantly increases. Results of this quasi-natural experiment, and our novel dataset in a non-voluntary private firm setting, contribute to the discussion revolving around the nexus between private and public information in debt contracting. As we focus exclusively on small private firms, our findings with respect to disclosure are unbiased by confounding effects of mandatory financial statement audits.

Keywords: mandatory public disclosure, access to bank debt, private firms

JEL Classification: D82, G14, M41