Does Private Firms’ Disclosure Affect Public Peers’ Information Environment?

Abstract

This study examines how private firms’ disclosures create information externalities for public firms’ information environment. Exploiting a setting with varying importance of private firms’ financial information, we document that public firms’ forecasted earnings are less accurate and more dispersed when private firms play a major role in the respective industry. Further, holding the importance of private firms’ disclosure constant and varying the supply of such information, by splitting the sample by the disclosure requirements for private firms, reveals that these effects are driven by private major players from those countries that we identify as opaque. Additional tests indicate that the externalities are only visible when the availability of information about public firms is relatively poor. Our findings support a cost–argument that explains the negative relation between analysts’ information acquisition– and processing costs and the availability of private firms’ information. Preliminary results from an event study suggest that this effect is causal.

Keywords: private firms, transparency, information environment, externalities, analyst forecasts

JEL Classification: D82, G14, M41