Firm Value Effects of Targeted Disclosure Regulation: The Role of Reputational Costs

Abstract

We study the reputational costs of ‘targeted disclosure regulation’ – disclosure mandates that pursue policy objectives outside of securities regulators’ traditional missions. This emerging type of disclosure regulation empowers civil society to influence firms’ actions through public pres-sure. We study the SEC’s extraction payments disclosure rule, which requires oil and gas firms to publish details about their payments to host governments. Consistent with reputational costs for affected firms, our event-study results document that the rule affects firm value more negatively where greater reputational risk makes firms more vulnerable to public pressure – particularly about foreign corruption. Our qualitative field evidence suggests that reputational costs arise be-cause the required disclosures facilitate pressure groups’ campaigning. We further uncover the reach of media outlets as an important mechanism magnifying firms’ reputational costs.

Keywords: Disclosure Regulation, Reputational Cost, Pressure Groups, Oil and Gas, Public Scrutiny

JEL Classification: K22, M41