External Finance, Firm Growth and the Benefits of Information Disclosure: Evidence from Finland

Abstract

In this paper we study the relation between firm-level disclosure quality and the availability of external finance to firms. Using data on Finnish firms that are mostly private and small, we first estimate ‘excess growth‘ made possible by external finance. We then show that the excess growth is associated with the quality of disclosure, and that at least a part of the association arises because firms with excess growth self-select. The association seems to be strongest for a priori financially constrained firms. Taken together, the results of our empirical analysis identify a specific mechanism through which firms in need for external finance voluntarily look for good disclosure quality. They look for it, because it reduces barriers to external finance. These empirical findings have implications for policy-makers who consider whether firms should be forced to ‘talk’