Abstract
We utilize the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous shock to the proprietary costs of disclosure and study the impact of the IDD on corporate financial reporting policy. We find compelling evidence that firms headquartered in states that adopt the IDD exhibit a significant increase in financial reporting opacity relative to firms headquartered in states that fail to adopt the IDD. Our finding is robust to a battery of sensitivity tests. Cross-sectional evidence shows that the impact of the IDD on opacity is more pronounced for firms with weak external monitoring. Further, our path analysis shows that financial reporting opacity engendered by the adoption of the IDD had broad negative consequences for capital market investors.
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