Information, Financing, and Investment
58 Pages Posted: 12 Jan 2018 Last revised: 9 Jul 2020
Date Written: July 7, 2020
By allowing investors to efficiently allocate capital, developed financial markets promote economic growth. We revisit a key component of financial market development, namely financial reporting standards, to identify a channel underpinning this link. We focus on introductions of new financial reporting standards and construct a novel text-based, firm-level measure of sensitivity to these standards. Relative to insensitive firms, sensitive firms reduce securities issuance by 11.4% and, despite compensating with internal sources of funds, cut investment by 10.8% after standards. These findings demonstrate that new standards trigger a substantial reallocation of capital through financial markets.
Keywords: capital markets regulation, capital allocation, financing, investment
JEL Classification: G18, G30, O16
Suggested Citation: Suggested Citation