Disclosure and Competition for Capital

49 Pages Posted: 11 Jun 2019 Last revised: 31 Mar 2020

See all articles by Stephanie F. Cheng

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business

Hao Xue

Duke University - Fuqua School of Business

Date Written: December 6, 2019

Abstract

We study the relation between disclosure and competition for capital, using Moody's 2010 recalibration of the municipal rating scale. On a relative basis, the recalibration advantaged highly upgraded issuers and disadvantaged lowly upgraded issuers. We develop a model to show that for disadvantaged issuers, the recalibration exacerbates a potential conflict between social welfare and government officials' personal preferences. Higher quality disclosures can mitigate this conflict. Empirically, we find that the disadvantaged issuers provide timelier and more frequent financial statements after the recalibration, particularly when those issuers face relatively intense competition for capital. This evidence supports the idea that a competitive disadvantage in raising capital can motivate issuers to improve disclosure quality.

Keywords: Disclosure Quality; Competition; Credit Ratings

JEL Classification: D80; G24; H74

Suggested Citation

Cheng, Stephanie F. and Cuny, Christine and Xue, Hao, Disclosure and Competition for Capital (December 6, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3402345 or http://dx.doi.org/10.2139/ssrn.3402345

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Christine Cuny (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Ste. 10-91
New York, NY NY 10012
United States
212-998-0423 (Phone)

Hao Xue

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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