The Effects of Firm Size, Corporate Governance Quality, and Bad News on Disclosure Compliance

Abstract

Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing that requires no computations or complex judgments, but is non-routine and may reveal value-decreasing information (i.e., bad news) that otherwise would not become public. The disclosures studied are those that firms provide in Form 8-K Item 4 when changing external auditors. We find that non-compliant firms have lower quality corporate governance and less need for external financing, but are not smaller than compliant control firms. Additional analyses indicate that compliance is negatively associated with bad news.

Keywords: Auditor change, compliance, mandatory disclosure, SEC staff comment letters, size-based regulation

JEL Classification: M41, M45, M49, G34, G38