Voluntary Risk Disclosure of Entrepreneurial Firms : Evidence from the OTC market

This study examines the determinants and consequences of voluntary risk factor disclosure (RFD) of smaller reporting companies traded in the over-the-counter (OTC) market. We find that firms that are more R&D intensive, have a higher level of firm risk, have debt or equity issuance in the near future, and are audited by Big 4 auditors are more likely to provide RFD voluntarily in their annual reports. The results indicate that firms that provide voluntary RFD have a greater likelihood of subsequent listing on major stock exchanges than firms that do not. Further, we document evidence that the consequences of voluntary RFD vary with its quality. In particular, the likelihood of trading up to the major stock exchanges in the future and the stock liquidity are positively associated with the quality of RFD. Overall, our findings shed light on the disclosure practices of small entrepreneurial firms and suggest that promising entrepreneurial firms appear to signal themselves through good disclosure practices. Our findings have policy implications on regulating disclosure practices of small firms.