Management Science
Vol. 62, No. 2, February 2016, pp. 456–478
 

 Susan Albring, Monica Banyi, Dan Dhaliwal, Raynolde Pereira

 Susan Albring
 Joseph I. Lubin School of Accounting, Martin J. Whitman School of Management, Syracuse University, Syracuse, New York 13244

 Monica Banyi
 McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904

 Dan Dhaliwal
 Department of Accounting, Eller College of Management, University of Arizona, Tucson, Arizona 85721; and Korea University Business School, Korea University, Seoul, Korea

 Raynolde Pereira
 School of Accountancy, Trulaske College of Business, University of Missouri, Columbia, Missouri 65211
 http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2014.2123

 Abstract

 Extant theory claims a firm’s information environment impacts the choice between debt and equity financing. However, empirical evidence supporting this contention is limited. We evaluate this relation within the context of Regulation Fair Disclosure (Reg FD), which prohibited the use of selective disclosure. We find that firms with high proprietary costs of public disclosure are more likely to resort to debt financing following the passage of Reg FD. This relation is not sensitive to whether a firm has relied on selective disclosure in the pre-Reg FD regime. We also evaluate changes in firm disclosure policy and find that firms that adopted an expansive public disclosure policy are more likely to turn to equity financing. Overall, our evidence is consistent with the pecking order theory: firms with deteriorated firm information environments increase their use of less information-sensitive debt, whereas firms with improved information environments favor the use of equity financing. This paper was accepted by Mary Barth, accounting.

 Keywords:
 information environment;
 financing decisions;
 disclosure;
 capital structure;
 Reg FD