Can Firms Foresee the Proprietary Cost of Mandatory Public Disclosure?

Abstract

This paper examines whether firms foresee the proprietary cost of their mandatory public disclosure by utilizing the supply-and-demand model in a private firm setting where proprietary cost is the primary driver for mandatory public disclosure and its subsequent paid demand. Private firms in the Netherlands are obliged to publicly file financial statements at the Dutch Chamber of Commerce (DCC) within 13 months after their fiscal year-end. This long filing delay serves as a proxy for the firm’s unwillingness to disclose and we measure demand as the timeliness by which these annual reports are subsequently requested at a fee with the DCC by users. Firm-level proprietary cost varies exogenously based on firm size due to disclosure regulation, that is, medium-sized (large) firms file an abbreviated (full) profit and loss account whereas small firms only file a balance sheet.

We document that supply and demand are significantly correlated ‒i.e., the higher the unwillingness of firms to disclose their annual report, the higher the subsequent demand for this report‒ and this correlation is economically significant. To tighten identification, we focus on firms confronted with a change in disclosure requirements due to a change in their size. Next, we exploit three exogenous legislative changes in disclosure regulation: two increases in legislative size criteria, and the requirement for medium-sized firms to disclose ‒next to a balance sheet and profit and loss account‒ a cash flow statement. Our results are also robust to alternative measures of proprietary cost, alternative measures of demand and supply, and the inclusion of additional control variables. Finally, we show paid demand for mandatory public disclosures is associated with subsequent real effects evidenced by lower future firm profitability, and a higher probability of patent application and M&A activity. Overall, this study shows that firms appear able to anticipate the economic significance of proprietary cost due to mandatory public disclosure caused by disclosure regulation.

Keywords: Proprietary Information; Mandatory Disclosure; Information Acquisition; Private Firms

JEL Classification: M40, M41