Entry and capital structure mimicking in concentrated markets: The role of incumbents? financial disclosures*

Little explains firms' capital structure decisions better than peer firms' capital structure decisions. Empirical work suggests that such ?mimicking? arises not only because firms share exposure to institutional environments, industry conditions, and other common factors, but also because financing decisions are direct functions of peers? decisions (e.g., Leary and Roberts, 2014; Frank and Goyal, 2009). Possible reasons for mimicking range from agency and reputation incentives (e.g., Scharfstein and Stein, 1990) to effects of product market competition (e.g., Bolton and Scharfstein, 1990), but central to nearly all explanations is the observability of financial information. Thus, much as information frictions figure prominently in canonical theories about capital structure decisions (e.g., Myers, 1984), these frictions likely have an important role in explaining how mimicking arises. We investigate the role of public financial disclosure in facilitating capital structure mimicking. We focus specifically on We examine whether the public availability of product market incumbents' financial disclosures leads to greater capital structure mimicking of incumbents by entrants. Exploiting a change in disclosure enforcement for German private firms in the mid-2000s, we find entrant-incumbent mimicking rises substantially in concentrated markets once incumbents' financial statements are publicly available. Additional tests exploring potential mechanisms are more consistent with interfirm learning underlying the effect than alternative channels. Our findings shed light on the effects of competitor financial statement disclosure on private firms? initial financing decisions and highlight how capital structure dependencies among peer firms arise. 0 2020 Elsevier B.V. All rights reserved.

Automated summary

Peer firms' capital structure decisions influence firms' capital structure decisions, with reasons ranging from agency and reputation incentives to effects of product market competition, and with the observability of financial information being a key factor. Investigating the role of public financial disclosure in facilitating capital structure mimicking, it was found that the public availability of incumbents' financial disclosures leads to greater capital structure mimicking by entrants.