Firm Disclosures and Investors’ Capital Rationing Incentives

50 Pages Posted: 28 Mar 2022 Last revised: 16 May 2023

See all articles by Jeroen Suijs

Jeroen Suijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Li Yang

Columbia Business School

Date Written: December 8, 2022

Abstract

This paper analyzes firm disclosures and associated consequences in an entrepreneurial financing setting. We construct a model where two entrepreneurs compete for a private equity investor's capital and use disclosure to influence the investor's belief. We show that disclosure in such markets increases firms' real investment in productive activities, but may also result in capital rationing by the investor. This finding contrasts with the conventional wisdom that disclosure alleviates information asymmetry and improves firms' access to external capital. When the investor allocates capital based on firms' disclosures, a disclosure contest results and firms increase their productive investment to enhance the disclosure outcomes. We show that such a disclosure contest can result in over-investment and that equity investors can limit over-investment by reducing the amount of capital that they make available to the firms. Consequently, more disclosure in private equity markets may reduce firms' access to equity capital.

Keywords: Disclosure, Real Investment, Competition for Capital, Capital Rationing

JEL Classification: M40, M41

Suggested Citation

Suijs, Jeroen and Yang, Li, Firm Disclosures and Investors’ Capital Rationing Incentives (December 8, 2022). Available at SSRN: https://ssrn.com/abstract=4044719 or http://dx.doi.org/10.2139/ssrn.4044719

Jeroen Suijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Li Yang (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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