Firm Growth and Disclosure: An Empirical Analysis

Abstract

Extant theoretical research posits that information asymmetry and agency issues affect the cost of external financing and hence impact firms' ability to finance its growth opportunities. In contrast, the literature on disclosure policy posits that an expanded and credible disclosure lowers the cost of external financing and improves firm's ability to pursue potentially profitable projects. An empirical implication is that disclosure can help firms grow by relaxing external financing constraints, thereby allowing capital to flow to positive NPV projects. This paper empirically evaluates this prediction using firm-level data over an eleven-year period. As anticipated by theory, we find a positive relation between firm disclosure policy and externally financed growth rate, after controlling for other influences.

Keywords: disclosure, external financing, firm growth

JEL Classification: G31, G32, M41, M44, M49