The Cost of Financial Disclosure for Start-Up Firms

with Greg Burke
Work in Progress
BibTeX citation available here. Contact me for a recent draft.

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 71% of issuers are willing to close their offering at least six weeks early to avoid disclosure, with 41% of issuers willing to close at least twenty weeks early. In the aggregate, these results indicate financial statement reporting requirements for Regulation Crowdfunding issuers have reduced the amount of investment in this market by $97 million, or 5.3 percent.