The Effect of Financial Reporting Regulation on Arm's Length Contracting

Abstract

We examine the effect of firms’ public disclosure on their banking. Exploiting discontinuous public disclosure requirements assigned to otherwise similar small and medium-sized private firms, we document that public disclosure shifts firms’ banking from relationship toward transactional approaches. Our results suggest that public disclosure increases bank competition, but also crowds out banks’ private information acquisition. As firms benefit from banks’ private information acquisition, firms prefer relatively low levels of public disclosure despite the costs associated with low bank competition.