Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public?

46 Pages Posted: 2 Aug 2019 Last revised: 21 Nov 2019

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

University of Minnesota - Twin Cities

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Date Written: July 29, 2019

Abstract

This paper investigates the effect of mandatory disclosure requirements for private firms on their decision to go public. Using detailed project-level data for biopharmaceutical firms, we explore the effects of a legal reform---the Food and Drug Administration Amendments Act (FDAAA)---which exogenously required that firms publicly disclose information regarding clinical trials. Exploiting cross-sectional heterogeneity in firms' exposure to the regulation based on their internal development portfolios, we find that affected firms are significantly more likely to transition to public equity markets following the reform. We also find that firms that go public due to the increased disclosure requirements subsequently reduce the size of their project portfolios while shifting to safer investments acquired externally. The results suggest that private firms' general information environment and disclosure requirements influence the propensity of going public, and the nature of their subsequent project decisions.

Keywords: initial public offerings, mandatory disclosure, proprietary cost, innovation

JEL Classification: D82, G31, G32, G34, G38, O31

Suggested Citation

Aghamolla, Cyrus and Thakor, Richard T., Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public? (July 29, 2019). Available at SSRN: https://ssrn.com/abstract=3428780 or http://dx.doi.org/10.2139/ssrn.3428780

Cyrus Aghamolla

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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