Proprietary Information Disclosure and Corporate Financing

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Accounting theory provides considerable insight into corporate disclosures practices and when managers might voluntarily disclose proprietary information. Yet, empirical evidence concerning when firms choose to credibly disclose such information is sparse. It is challenging in general to assess the proprietary information content of corporate disclosures because (i) firms can disseminate information via many different channels, and (ii) credibility of such disclosures is a serious concern. I propose a methodology that addresses these issues, and test the hypothesis that firms disclose more proprietary information ahead of raising equity capital. Specifically, I measure the extent of proprietary information these firms disclose by the magnitude of the association between a private information-based proxy and stock returns prior to equity offerings. To establish a causal link between equity financing and disclosures, I use a difference-in-differences design around the Securities Offering Reform of 2005 that reduced litigation risks associated with disclosures and relaxed restrictions on forward-looking disclosures. I find that equity-issuing firms disclose more than twice as much proprietary information as non-issuing control firms. This result is robust after controlling for any leakage of private information from insider trading and from analysts' information gathering activities. My findings also suggest that larger equity issuers experience 10 to 23 percent greater drop in underpricing relative to smaller equity issuers in the post-Reform period. Finally, by examining a broad sample of firms issuing equity, debt or relying on internal funds, I find that financing choice shapes firms' proprietary information disclosures.

It is also possible that proprietary cost considerations overwhelm these capital market benefits for some firms, inhibiting them from divulging sensitive private information. These firms would have a natural incentive to seek financing via other avenues. Indeed, I find that firms with higher proprietary cost concerns are more likely to raise equity capital via private placements relative to public offerings. Taken together, these results suggest that corporate disclosure policies and financing decisions are interlinked in a significant way.

Doctor of Philosophy
Disclosure, Proprietary Information, Securities Regulation

Zufarov, Rustam. "Proprietary Information Disclosure and Corporate Financing." (2020) Diss., Rice University.

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