The Economic Consequences of Increased Disclosure

TLDR

Economic theory predicts that increased disclosure reduces information asymmetry and lowers a firm’s cost of capital, yet empirical evidence is mixed, possibly because the U.S. reporting environment is already rich. This paper investigates whether German firms that switched to IAS or US GAAP—thereby committing to higher disclosure—experience reduced information asymmetry. The study compares these switching firms to those remaining under German reporting, using proxies such as bid‑ask spread and trading volume.

Abstract

Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.