Gassen and Kosi investigate the effects of private firm financial reporting transparency as private firms constitute a central part of economic activity and as the less complex environment of private firms allows for cleaner identification of underlying mechanisms. They study how information spillover effects across private firms with more or less strict reporting requirements affect the investment efficiency of private firms. In addition, they explore the effect of private firm transparency on the market for mergers and acquisitions and how private firm transparency interacts with the labor market.
How does private firm transparency affect investment as well as the M&A and labor market?
While existing empirical research investigates public firms, the vast majority of firms across the world are private. In Europe, small and medium-sized enterprises (SMEs) contribute significantly to job creation and economic growth: They generate 57 % of value added in the non-financial sector and employ roughly two-thirds of the EU employees. Besides their descriptive appeal, they are an attractive setting for clear identification of the effects of transparency. They tend to be smaller, more regionally focused, have simpler business models and fewer stakeholders. All these aspects imply that research methods require less intensive control variables in quasi-experimental field settings, and thus make it easier to empirically identify causal mechanisms at work.
We study the effect of private firm transparency on investment behavior and the labor market. Starting from a firm-level perspective, varying transparency regulation for firms of different sizes provides us with a setting to examine potential information spillover effects across firms on their respective investment efficiency. Specifically, we investigate whether and how heterogeneous transparency across private firms helps the less transparent ones make better investment decisions due to higher transparency of their peers. From a market-wide perspective, we investigate external investors entering the market for mergers and acquisitions. We expect higher transparency of private firms to lead to less frictions in the M&A market. The second part of our research investigates the demand of employees for financial information and the effects of firm transparency on regional labor mobility. We use data from the German Business Panel, and a variety of data from online and administrative sources.
Our work will help to assess the benefits and costs of regulated private firm transparency. As regulatory reporting requirements for private firms vary widely around the globe, these insights can inform the international regulatory debate.