From WSJ MarketWatch
It’s widely believed that uncertainty is bad for business. If you don’t have the right information, you make the wrong decisions. Or you make no decisions at all. We saw this play out during the financial crisis when there was quite a lot of uncertainty and many investors held back.
With that in mind, my colleagues and I recently looked at the effect of having greater financial information available within an industry. Specifically, we studied the impact of public firms on an industry, as public firms are required to disclose large amounts of information. They have to issue quarterly financial statements and provide information on operational details such as business strategy, expected future outlook, and business risk. Financial analysts and the business press provide even more information on those companies. Taken together, that disclosure activity can improve the information environment for firms in that industry by reducing uncertainty.
In contrast, little is reported about private firms, which are not required to publicly disclose information in the U.S. Further, analysts and reporters tend to cover them less as well.
We found that greater public firm presence leads to less uncertainty and significantly increases investment efficiency, for both public and private firms. The effect is greater in industries in which public firms produce more informative reports, provide more forecasts and receive more attention from analysts and reporters. The effect also is greater for industries in which there are higher levels of investment irreversibility, meaning more sunk costs.
Read the full post at MarketWatch.
Nemit Shroff is an Assistant Professor of Accounting at the MIT Sloan School of Management.