The Economics of Firms' Public Disclosure: Theory and Evidence

Abstract

Using a price-theoretic framework, we derive and empirically test a fundamental demand force shaping firms’ public disclosure decisions. Our framework suggests that the number of firms’ transacting stakeholders, not just their shareholders, is a major determinant of disclosure demand and, hence, firms’ decision to disclose publicly. Exploiting comprehensive data on stakeholders’ revealed preferences for private firms’ public disclosure, our empirical analysis supports the predicted importance of the number of transacting stakeholders for firms’ public disclosure across several settings and disclosure margins. Our framework is particularly suited for guiding the growing literature investigating non-standard public disclosure settings such as private firms and the influence of stakeholders other than shareholders.