More Frequent Disclosure and Capital Structure

This paper examines the effect of more frequent disclosure on firms’ capital structure. We argue that more frequent disclosure enables firms to raise equity at more favorable conditions because shareholders are more willing to invest due to improved transparency and better monitoring of managers. By contrast, debt investors are less affected by more frequent disclosure because of access to private information and mitigation of agency conflicts through financial covenants. We exploit the staggered implementation of a directive that harmonized the reporting frequency requirements across and within European countries. Using a difference-in-differences approach for a matched sample of firms, we find that more frequent disclosure is associated with lower financial leverage. In additional analyses, we find that this effect is stronger for firms with higher demands for external financing, weaker information environments, and higher ex-ante agency costs. We also provide evidence that the reporting frequency-induced reduction in leverage is attributable to a higher amount of equity issuance by firms and not to a change in debt issuance.