Transparency with side effects: Do reporting requirements place too much of a burden on small businesses?

Transparency is often seen as a hallmark of responsible business conduct and regulators frequently turn to mandatory reporting to improve it. However, a recent field experiment by Joachim Gassen and Maximilian Muhn, published in the Journal of Accounting Research, shows that for many small private firms, the effects of financial disclosure are more complex than often assumed. The findings suggest that for many small firms, disclosure rules may unintentionally bring more costs than benefits, raising the question of whether more flexible, voluntary systems would better support economic resilience.

Private firms are central to modern economies: they create jobs, shape investment flows, and drive competition. Because of this significance, regulators in many countries, especially in the European Union, require them to prepare and publish financial statements. In the EU, even the smallest “micro-entities” have to compile and file annual financial reports. Compliance with this regulation is strictly enforced and the reports are made public via business registries and information providers.

While transparent actions, in this case publishing financial statements, can be positive for businesses, the questions arise if these disclosure rules actually help small firms or imposes unnecessary burdens? Do firms see value in transparency, or do they try to avoid it when possible? And are affected firms even aware of their rights and obligations when it comes to disclosure?

A field experiment with more than 25,000 German firms

In the early 2010s, EU policymakers decided to ease disclosure requirements for very small firms. In Germany, this reform gave smaller firms the option to block public access to their financial statements since 2012. We built on this policy change by randomly informing a large group of more than 25,000 German firms about their option to restrict disclosure. We also varied the framing of our messages, highlighting different stakeholder groups (such as competitors, capital providers, or customers) to see how concerns about these groups influenced firms’ disclosure behavior.

Informed companies were 15 percent more likely to decide against disclosure

The study shows firms that were aware of the restriction option were 15 percent more likely to withhold their financial statements. The effect was strongest among smaller, more mature firms in less capital-intensive sectors—companies that generally see little upside from making sensitive information public. It was also striking that many of these firms continued restricting access in subsequent years, showing that a one-time nudge can have long-term effects.

Firms adjust disclosure behavior once they are informed of their options

One reason this had such a strong effect is that many firms simply did not know they had the option to restrict disclosure. Once informed, they quickly re-evaluated their strategies. This suggests that private firms often do not operate with perfect information and may face real processing costs when navigating regulations.

Survey evidence also revealed that many businesses consider public disclosure requirements as a burden, with perceived costs outweighing benefits. Again, this is especially pronounced for very small firms.

To test whether reducing disclosure obligations actually helps firms, we tracked outcomes beyond reporting behavior. Firms in the treatment group that were made aware of the restriction option were 2.7 percentage points more likely to still be operating years later compared to a baseline survival rate of 73.2 percent (as measured by still having an active website). This suggestive evidence points to modest but meaningful long-run benefits of easing reporting requirements.

Competitors and privacy issues shape how firms approach transparency

Disclosure regulations create a trade-off for private firms. On one side, transparency reduces information gaps between firms and potential partners like investors or customers. On the other side, it exposes sensitive details to competitors or non-transactional parties, which can potentially harm the firm.

Our study shows that firms are especially concerned about competitors and privacy issues. Firms that received messaging highlighting that competitors might use their financial statements, they were much more likely to limit public access. This highlights how strongly competitive pressures influence disclosure choices. At the same time, other outsiders, such as the general public, can also affect these decisions when firms feel that the costs of disclosure outweigh the benefits.

Why small firms need tailored reporting rules

These findings raise important aspects for policymakers:

1. Perfect information cannot be assumed. Many firms lack awareness of their disclosure options, and this ignorance directly affects their behavior.
2. One-size-fits-all rules do not work. Mandatory disclosure may often unintentionally lead to more costs than benefits for small private firms.
3. Policy design should balance stakeholders. While investors and creditors may gain from transparency, competitors also gain, sometimes at the firm’s expense.

In practice, this means regulators should consider tailoring requirements to different stakeholders’ needs. In the U.S., for instance, private firms are not obliged to disclose financial reports and very few choose to publish voluntarily. Regulators in Europe should revisit whether mandatory disclosure for its smallest firms is truly justified or whether a more flexible, voluntary system could better support entrepreneurship and economic resilience.

To cite this blog: Gassen, J., & Muhn, M. (2025). Transparency with side effects: Do reporting requirements place too much of a burden on small businesses? TRR 266 Accounting for Transparency Blog. https://www.accounting-for-transparency.de/reporting-requirements-small-businesses/