The Effect of Mandatory Information Disclosure on Financial Constraints

Abstract

This paper examines the effects of mandatory disclosure on firms’ financial constraints and investment policies. I study a regulatory reform requiring firms of a certain size to file a standard 10K instead of choosing between the standard form and an abbreviated 10K. Companies that voluntarily used the standard 10K form before the reform become less debt-constrained but more equity-constrained afterward. These firms also issue more debt and increase their investment. The findings are consistent with mandatory disclosure providing a commitment device for future disclosure. However, this comes at the cost of losing the possibility of signaling high quality through voluntary disclosure.

Keywords: Information Disclosure, Firm Financing, Corporate Regulation, Transparency

JEL Classification: G320, G380