Conclusion
We examine the impact of ICWs on firms’ financing choices and whether and how firms alter their financing choices after the mandated disclosure of ICWs. We find that ICW firms are more likely to seek external financing than non-ICW firms before disclosing their ICWs but, post-disclosure, become similar in respect of external financing. This suggests that the previously documented increases in the cost of capital suppress ICW firms’ proclivity for external capital rather than make external financing difficult. More importantly, we find that, pre-disclosure, ICW firms are more likely than non-ICW firms to use equity financing as opposed to debt and that this propensity vanishes post-disclosure. To illuminate ICW firms’ motives for taking on greater equity financing pre-disclosure, we examine the use of proceeds. We find that ICW firms are more likely than non-ICW firms to use equity issue proceeds to finance investments. After disclosure, ICW and nonICW firms exhibit similar preferences in using proceeds, suggesting that ICW firms take on more equity with the motive of financing investment and that disclosure ends this practice. Our overall evidence indicates that the ICW disclosure substantially alters corporate information environment and managerial incentives, which leads to significant changes in firms’ debt-equity choices.
