Essays on Empirical Corporate Finance

Abstract

This paper examines how the intensity of the Mandatory Financial Disclosure Regulation at the country-industry level can affect the precautionary cash policy of private firms. Cash holding provides a downside protection against the cash-shortfall risk. Mandated disclosures of industrypeers generate an industry-wide reduction on the cost of capital, and through this, reduce the cost of holding cash for precautionary reasons. At the same time, the set of mandated disclosures constitutes a source of learning about industry economic trends, increasing the firms’ accuracy in their cash-shortfall risk assessments. The lower uncertainty generated by the set of mandated disclosure reduces the incentive for holding precautionary cash. Using firm-size based mandatory disclosure regulations for private firms of 12 European countries, I test which effect predominates. I find that private firms hold less cash when they operate in industries with a higher proportion of firms mandated to disclose full financial statements and that this negative relation is stronger in industries with a higher cash-shortfall risk. In the within-industry analysis, I find that the cash reduction is stronger in younger and more labor-intensive competitors, suggesting that these types of firm benefit more from the uncertainty reduction generated by peers’ mandated disclosures due to their relative shorter business experience and higher adjustment cost. Overall, the findings in this paper contribute to the open debate regarding the role of Mandatory Financial Disclosure Regulation of private firms in the socially desirable level of disclosure transparency.