The Effect of Mandatory Disclosure on Private Firms’ Trading Volume: Evidence from U.S. Banks

Project: Research

View graph of relations


Prior empirical studies suggest that mandatory financial disclosure by public firms increases the trading volumes of their shares. However, to the best of our knowledge, there has been no empirical evidence regarding the effects of financial disclosure mandates on trading volumes of private firms, most likely due to the lack of data on private firms. Theoretically, mandatory financial disclosure may have a different effect on private firms from public firms (Barth, Clinch, and Shibano, 1999), given that their disclosure environments are different. In this study, we propose to examine the effects of financial disclosure mandates for private firms on the trading volumes of their shares. Trading volume in this paper stands for the number of net trades, which changes ownership structure. On the one hand, mandatory financial disclosure may reduce a private firm’s trading volume because mandatory disclosure unveils the firm’s proprietary information, reduces the information advantage of insiders, makes trading less profitable for them, and, thus, mayreduce insiders’ willingness to trade. On the other hand, mandatory financial disclosure may increase a private firm’s trading volume because mandatory disclosure increases the private firm’s transparency and, thus, may attract more potential outside investors. Using the banking industry as a setting, we will investigate the impact of financial disclosure mandates for private U.S. banks on the trading volumes of their shares. Specifically, we will analyze a novel dataset on private U.S. banks’ shareholder ownership and use a difference-indifferences research design to examine the impact of a quasi-exogenous deregulatory change in March 2006, which required banks with less than $500 million in total consolidated assets to file less detailed and less frequent regulatory financial reports. We predict that private banks with less than $500 million in consolidated total assets, compared with private bankswith $500 million or more, experienced a relative increase in trading volumes following the deregulatory change. In addition, we predict that the increase in trading volumes is mainly driven by insiders buying more shares. Our study will contribute to the literature in several ways. First, to the best of our knowledge, this study will provide the first empirical evidence for how mandatory disclosure by private firms affects their trading volumes. Prior research focuses only on the effects of mandatory disclosure on public firms. Second, to the best of our knowledge, this study will provide the first empirical evidence for how investors select private firms to invest in.  


Project number9048252
Grant typeECS
Effective start/end date1/01/23 → …