“Does the firm information environment influence financing decisions? A test using disclosure regulation”

0

Author Information : Susan Albring (Whitman School of Management, Syracuse University)
Monica Banyi (College of Business & Economics, University of Idaho)
Dan S. Dhaliwal (College of Business & Economics, University of Idaho)
Raynolde Pereira (Trulaske College of Business, University of Missouri at Columbia)

Year of Publication : Management Science (2015)

Summary of Findings : Firms with deteriorated firm information environments increase their use of less information-sensitive debt, while firms with improved information environments favor equity financing.

Research Questions : 1. Does a firm’s information environment impact its financing decisions?

2. How does Regulation Fair Disclosure affect the form and flow of firm-specific information?

3. Does a switch from private disclosure to public disclosure reduce (increase) the likelihood of issuing debt (equity) and does a switch from private disclosure to nondisclosure increase (reduce) the likelihood of issuing debt (equity)?

What we know : Theory suggests that a firm’s information environment impacts the choice between debt and equity financing, however there is limited empirical evidence to support this theory.

Novel Findings : Firms with deteriorated firm information environments increase their use of less information-sensitive debt, while firms with improved information environments favor equity financing.

Firms with high proprietary costs of public disclosure are more likely to use debt financing following the passage of Reg FD.

Implications for Practice : Firms facing considerable costs of public disclosure may elect to use debt financing, based on the results in this study, which found debt financing preferable for firms for which regulation impedes flow of firm specific information.

Improvements in the firm information environment favor equity financing, particularly for firms that have adopted an expansive public disclosure policy.

Implications for Policy: The passage of Reg FD shut down the selective disclosure channel, inducing firms with expansive public disclosure policies to use equity financing.

Implications on Research: The evidence in this study is consistent with widely adopted theory – that firms with deteriorated firm information environments tend to use debt financing, while those with more expansive public disclosure policies favor equity financing.

Full Citations : “Does the firm information environment influence financing decisions? A test using disclosure regulation” (with Banyi, M., Dahliwal, D.S. & Pereira, R.), Management Science, 2015.

http://whitman.syr.edu/faculty-and-research/research/pdfs/AlbringFirmEnvironmentDecisions.pdf

Abstract : Susan Albring and her co-authors find that the quality of a firm’s information environment impacts the choice between debt and equity financing within the context of Regulation Fair Disclosure (Reg FD). The goal of this work was to evaluate whether a firm's information environment impacts the choice between debt and equity financing within the context of Regulation Fair Disclosure (Reg FD), which prohibited the use of selective disclosure. The authors find that firms with high proprietary costs of public disclosure are more likely to use debt financing after Reg FD. They also evaluate changes in firm disclosure policy and find firms that adopted an expansive public disclosure policy are more likely to use equity financing. Overall, “the evidence is consistent with theory: firms with deteriorated firm information environments increase their use of less information-sensitive debt, while firms with improved information environments favor equity financing,” said Albring.

Susan Albring

Susan Albring

Professor Albring is an associate professor of accounting. Her research is focused on the effect of repatriation of foreign earnings on firm capital structure decisions.
Susan Albring
Share.

Comments are closed.