Corporate disclosure strategies before business failure: The case of voluntary disclosure of sales by small and medium sized enterprises

Small and Medium Sized Enterprises (SMEs) in Belgium are allowed to publish their financial statements in an abridged format. Disclosure of sales in the abridged profit and loss account is not mandatory but is left to the discretion of the firm. Prior empirical research (Van de Wiele, 2002) has shown that company characteristics like financial structure, ownership and performance are related to the observation of either disclosure or non-disclosure. Also, signals of financial distress, like expired tax debts, are significantly related to the likelihood of disclosure for a sample of SMEs that remain in business the next year. In this paper, we first re-examine the relation between company characteristics and disclosure for an extended sample of successful as well as failing businesses and include the event of failure as an additional explanatory variable. We find that failing firms are less likely to disclose sales in the year before failure than their successful competitors. Second, we look at changes in the disclosure decision one year before failure. Most successful companies tend to follow a consistent disclosure or non-disclosure strategy. A switch from disclosure to non-disclosure is observed more frequently with failing businesses. This raises the question whether the non-disclosure signal could be a relevant variable for failure prediction. The next step in the analysis relies on existing failure prediction models that were specifically developed for Belgian companies (Ooghe, Joos and De Bourdeaudhuij, 1995). If we take other financial characteristics, which signal financial distress, into account, a switch towards non-disclosure is significantly related to the likelihood of failure, but the additional information provided by the non-disclosure signal is weak. This paper is closely related to research concerning the relation between financial distress and accounting choice or accounting changes (see e.g. Peltier-Rivest, 1999 or DeAngelo, DeAngelo and Skinner, 1994). Moreover, it further extends the disclosure literature by linking the decision to disclose sales to the actual event of failure.