The Cost of Financial Disclosure for Start-Up Firms

with Greg Burke
Working Paper
SSRN working paper available here. BibTeX citation available here.

Abstract: While there exists a vast literature exploring the benefits of mandated financial disclosure, few have documented the direct cost of issuing financial statements. Using a sample of start-up firms where the costs of financial reporting may be most material, we examine entrepreneurs’ willingness to sacrifice further invested capital during a securities offering in order to avoid financial disclosure. First, we show a dramatic increase in offering closures immediately before their deadline to file updated financials. Then, we estimate a model of entrepreneurs’ offering closure decisions to recover the distribution of financial disclosure costs. We find that the reporting requirement curtails aggregate offering time by 6.1 percent, reducing investment in our Regulation Crowdfunding sample by an estimated $53 million. Behind these aggregates lies a pronounced willingness to forgo fundraising time whereby 70 percent of issuers are willing to close their offering at least six weeks early to avoid disclosure, and 18 percent of issuers are willing to close at least twenty weeks early.