Reduced disclosure and default risk: analysis of smaller reporting companies

Yin, Shiyan; Yao, Kai; Chevapatrakul, Thanaset; Huang, Rong

Abstract

We examine the causal effect of reduced disclosure levels on the risk of default. Employing regression discontinuity (RD) design as our main identification strategy and the smaller reporting company rule (SRC rule) as the exogenous source of variation, we show that smaller reporting companies (SRCs), which are permitted to provide scaled disclosures in their 10-Ks, experience significantly and economically higher default risk. We demonstrate that, while there is no effect of information loss if a smaller reporting company voluntarily maintains its disclosure level by continuing to report its financial performance in full, there is an increase in its default risk due to the loss of commitment to mandatory disclosure. We also find that, compared to previously qualified SRCs, newly qualified smaller reporting companies face steeper increases in bankruptcy risk during their first year of eligibility. Our analysis indicates that strong external oversight mechanisms, better corporate governance, and credible audit quality attenuate the negative impact of reduced disclosure levels on the risk of default. Our results are robust to alternative model specifications, RD design assumptions, and measures of default risk.

Citation

Yin, S., Yao, K., Chevapatrakul, T., & Huang, R. (2024). Reduced disclosure and default risk: analysis of smaller reporting companies. Review of Quantitative Finance and Accounting, 63, 355-395. https://doi.org/10.1007/s11156-024-01262-8

• Journal Article Type: Article
• Acceptance Date: Feb 29, 2024
• Online Publication Date: Mar 27, 2024
• Publication Date: 2024-07
• Deposit Date: Mar 12, 2024
• Publicly Available Date: Mar 28, 2025
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 63
• Pages: 355-395
• DOI: https://doi.org/10.1007/s11156-024-01262-8
• Keywords: Smaller Reporting Company Rule; disclosure; default risk; regression discontinuity
• Public URL: https://nottingham-repository.worktribe.com/output/32456714
• Publisher URL: https://link.springer.com/article/10.1007/s11156-024-01262-8