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Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public?

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  • CYRUS AGHAMOLLA
  • RICHARD T. THAKOR

Abstract

This paper investigates the effect of mandatory disclosure requirements for private firms on their decision to go public. Using detailed project‐level data for biopharmaceutical firms, we explore the effects of a legal reform that exogenously required firms to publicly disclose information regarding clinical trials. Exploiting cross‐sectional heterogeneity in firms' exposure to the regulation based on their internal development portfolios, we find that affected firms are significantly more likely to transition to public equity markets following the reform. Moreover, firms that go public because of the increased disclosure requirements subsequently reduce the size of their project portfolios while shifting to safer investments acquired externally. We provide additional evidence for the main hypothesis using a second setting: a 2006 German reform which enhanced the enforcement of mandatory disclosure requirements for private firms. The results suggest that private firms' general information environment and disclosure requirements influence the propensity of going public.

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  • Cyrus Aghamolla & Richard T. Thakor, 2022. "Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public?," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 755-804, June.
    • Handle: RePEc:bla:joares:v:60:y:2022:i:3:p:755-804
    DOI: 10.1111/1475-679X.12396
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    Cited by:

    1. Michael Ewens & Joan Farre-Mensa, 2020. "The Deregulation of the Private Equity Markets and the Decline in IPOs," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5463-5509.
    2. Matthias Breuer, 2021. "How Does Financial‐Reporting Regulation Affect Industry‐Wide Resource Allocation?," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 59-110, March.
    3. Michael Ewens & Joan Farre-Mensa, 2022. "Private or Public Equity? The Evolving Entrepreneurial Finance Landscape," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 271-293, November.
    4. Zhao, Jing & Huang, Jingchang & Liu, Feng, 2023. "Green credit policy and investment-cash flow sensitivity: Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 52(C).
    5. Lo, Andrew W. & Thakor, Richard T., 2023. "Financial intermediation and the funding of biomedical innovation: A review," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    6. Sara Casella & Hanbaek Lee & Sergio Villalvazo, 2023. "Disclosure Regulation, Intangible Capital and the Disappearance of Public Firms," Finance and Economics Discussion Series 2023-050, Board of Governors of the Federal Reserve System (U.S.).
    7. Zhao, Jing & Huang, Jingchang & Dou, Huan, 2023. "Internet searching and investment sensitivity to stock price: Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 51(C).
    8. Yost, Benjamin P., 2023. "Do tax-based proprietary costs discourage public listing?," Journal of Accounting and Economics, Elsevier, vol. 75(2).

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