Disclosure Enforcement Consequences – Evidence from Germany
53 Pages Posted: 1 Jun 2017 Last revised: 7 Aug 2018
Date Written: August 2017
Abstract
In 2006 Germany passed a disclosure enforcement law (EHUG) that strengthened the enforcement of financial statement disclosure in particular for non-listed firms whose compliance before the law was just about 16%. After introducing recurring fines of €2,500 to €25,000 disclosure rates surged to above 90%. We examine why most firms did not disclose prior to the law and potential unintended consequences of forcing firms to disclose. While conventional databases contain information of only disclosing firms (compliers), we use proprietary data from the Deutsche Bundesbank (German Central Bank) covering financial statements of compliers, non-compliers and non-disclosers (firms exempt from disclosure). Our evidence suggests that disclosure rates before the law were low not because firms were indifferent about disclosure but because they were minimizing disclosure related costs. In addition, using compliers and non-disclosers as control groups, in difference-in-difference as well as regression discontinuity analyses, we document that despite the absence of disclosure quality enforcement, non-compliers did not significantly reduce financial reporting quality after they were forced to comply. They also were not more likely to manage asset size/legal form to avoid disclosure. The only evidence we find consistent with efforts to reduce disclosure costs is that after the law, non-compliers were more likely to manage their size/legal form to avoid disclosing income statements. Overall, we document that the law increased disclosure quantity without significantly reducing disclosure quality and having relatively modest unintended consequences related to disclosure avoidance.
Keywords: disclosure enforcement, EHUG, financial reporting quality
JEL Classification: M4, M41
Suggested Citation: Suggested Citation