The regulatory consensus on disclosure is crumbling. While the academic literature has widely documented beneficial effects of increased disclosures, authorities have begun to retrench disclosure requirements amid criticisms of cost and complexity. Recently, investors in the EU have faced reduced reporting frequencies and, in Singapore, diminished amounts of mandatory information. Regulators have consistently sought to increase the attractiveness of stock markets, to which low information asymmetry decisively contributes. Yet there is virtually no evidence of how deregulation affects information asymmetries. For this reason, we answer the question of whether a reduction in minimum content requirements for quarterly reporting increases information asymmetries and decreases firm value.
In a recent working paper, we consider the 2015 transposition of the EU’s revised Transparency Directive 2013/50/EU into German law. The regulatory change resulted in the repeal of mandatory quarterly reporting, and the Frankfurt Stock Exchange (FSE) consequently mandated only descriptive quarterly management statements for firms listed in the Prime Standard, ie companies complying with the highest transparency standards within the FSE. Since 2016, firms listed in the Prime Standard have had various options for quarterly financial reports. While some firms preserved full quarterly reporting, others reduced the information provided to investors, paving the way for a quasi-natural experiment that we take advantage of in our empirical analysis. For our study, we have identified all firms that have been listed in the Prime Standard of the FSE from 2012 to 2019. This has allowed us to investigate the medium- to long-term effects of deregulation and the type of firms that are particularly affected.
To address the fact that firms could freely choose the content level of quarterly reporting beyond the minimum requirement and could in principle stick to the highest quarterly reporting level, we have classified quarterly reports of firms into four categories. The classification is based on the identification of selected and previously mandatory content elements in quarterly reports. This allowed us to measure the extent and quality of quarterly reports to study the effects of a decrease in quarterly reporting level.
In 2016, 44% of Prime Standard firms still published quarterly financial reports, while the remaining firms reduced their reporting content. The level of quarterly reports persistently declined over the years, potentially because many firms first wanted to observe the market effects when peer firms deviated from the mandatory reporting regime. Finally, in 2019, only 24% of Prime Standard firms voluntarily published a complete quarterly financial report.
Overall, our regression analysis results confirm that information asymmetry increases and firm value decreases when quarterly reporting levels decrease. The increase in information asymmetry in the market is not the result of the deregulation as such, but most likely stems from the fact that firms that are inherently more prone to the negative effects of information asymmetries have not taken the opportunity to report more. However, the analysis of a matched control sample provides some evidence that information asymmetry also increased because of the deregulation discussed above and beyond these selection effects. Moreover, the reduction in firm value can be directly attributed to the policy change.
In addition, we measured firms’ information environment using two different variables. First, we examined the additional listing of Prime Standard Firms in a selection index. Second, we measured media coverage using the information flow through press releases and newswires. Our regression analysis of the firms’ information environment reveals substantial heterogeneity. Second-tier stocks and firms with low media coverage display stronger adverse effects for information asymmetry and firm value. Thus, we extend previous research on disclosure regulation by showing that information asymmetry increases and firm value decreases for second-tier stocks and firms with low media coverage, but not for firms with an already very good information flow. We also add to the understanding of the heterogeneity of regulatory action, namely that quarterly reporting is more relevant for some stocks but not for others: second-tier stocks and stocks with low media coverage suffer from deregulation, whereas reducing quarterly reporting is irrelevant when the information flow is already high.
While quarterly reporting has previously been assumed to be an additional burden for small firms, it is precisely these firms operating in a poor information environment that suffer negative effects of lower quarterly reporting levels. From the perspective of investor protection, regular and comprehensive reporting seems to be necessary for firms after all.
Vanessa Behrmann is a Researcher at the University of Bremen.
Lars Hornuf is a Professor at the University of Bremen.
Jochen Zimmermann is a Professor at the University of Bremen.