Private firms are the backbone of our economies, influencing everything from investment levels to job creation to market competition. Given their collective significance, various regulatory agencies outside the U.S. impose financial disclosure (and sometimes audit) requirements on these firms. In particular, in the European Union, millions of “micro-entities” have been required to compile and file financial statements annually. Compliance with these rules has been strictly enforced, and these financial statements are subsequently made public through business registers and information intermediaries.

Despite these extensive requirements, there is still little systematic evidence addressing several key economic questions: Do small private firms perceive required disclosures as beneficial or burdensome? What drives their decisions to be transparent or opaque? Are firms aware of their regulatory environment and of the consequences of their disclosure choices, or do they face information processing costs themselves? And do such transparency regulations place an undue burden on the smallest firms in the economy?

Our recent field experiment with over 25,000 private firms in Germany addresses these questions by examining how informational constraints and stakeholder considerations influence disclosure practices.

The Experiment in the German Setting

Following efforts to reduce the burden on the smallest firms in the economy, the European Union introduced policies in the early 2010s to ease disclosure requirements on very small private firms. Our study focuses on the resulting policy change in Germany, which allowed small private firms to restrict access to their financial statements, which would otherwise be publicly available. In particular, our experiment randomly informed a subset of more than 25,000 firms about this restriction option and subtly varied the messaging to explore how different stakeholder considerations (such as competitors, capital providers, or customers) affected firms’ disclosure decisions.

The results were striking: Firms informed about the restriction option were 15 percent more likely to restrict access to their subsequent financial statements. This effect was particularly pronounced among smaller, more mature firms in less capital-intensive industries, where the net benefits of public disclosure are generally lower. Treated firms were also more likely to keep restricting their financial statements in future years, demonstrating the lasting impact of the information treatment.

Informational Constraints and Processing Costs

Many firms in our sample appeared to be unaware of the option to restrict access to their financial statements until informed by our experiment, as shown by the large treatment effects. This highlights a key insight: Informational constraints – such as a lack of awareness about disclosure options or the behavior of peer firms – significantly influence firms’ decisions. Once these constraints were lifted, firms were quick to reassess their disclosure strategies, suggesting that private firms may not always optimize their transparency choices in the absence of perfect information. Indeed, firms themselves (particularly private firms that lack market feedback on their decisions) might face significant information processing costs.

Furthermore, our survey evidence revealed that firms often perceive public disclosure requirements as burdensome, outweighing the potential benefits. This imbalance is particularly pronounced for very small private firms, which tend to derive the most negative net benefits from disclosure.

Based on the above, one might wonder whether, regardless of firm perceptions, financial transparency is good or bad for small private firms overall. To shed light on this issue, we collected website data and data on liquidations or insolvencies to assess whether firms that were informed about the restriction option in our experiment (and hence had a higher exogenous probability of restricting access) were more likely to be operational years later. We find that this group of firms has a 2.7 percent higher probability of being active relative to a baseline continuation rate of 73.2 percent. This result tentatively suggests that reducing public disclosure burdens may have positive long-term effects on firms.

Why Does Transparency Matter for Private Firms?

Private firms often face a trade-off when deciding whether to disclose or withhold financial information. On one hand, financial transparency can reduce information asymmetries between the firm and potential investors, suppliers, or customers. However, this argument relies on transactional stakeholders using the public information. On the other hand, public disclosure may also expose sensitive information to competitors or other non-transacting stakeholders, potentially harming the firm.

Our study finds that firms are particularly wary of competitors or have privacy concerns. Firms exposed to messaging that highlighted competitors as potential users of financial statements were significantly more likely to restrict access, indicating that competitive concerns play a critical role in disclosure decisions. However, other non-transactional stakeholders, such as general interest parties, may also influence these decisions when the perceived net benefits of disclosure become negative.

Implications for Policy and Practice

The findings of this experiment have several important implications. First, the assumption that private firms make decisions with perfect information might not always be justified. Second, the study suggests that a regulatory framework aimed at enhancing transparency may unintentionally place an undue burden on firms, particularly on smaller firms that derive limited benefits from public disclosure. Third, the study highlights the potential for policy interventions to better align disclosure requirements with firms’ needs.

Moreover, our results emphasize the importance of considering various stakeholders when designing disclosure regulations. While transparency can benefit capital providers and other business partners, it may also expose firms to competitive risks, leading to more cautious disclosure practices.

Regulating Financial Transparency of Private Firms

Our results suggest that the net benefits of mandatory financial disclosure for small private firms are relatively low and often negative. This raises the question of whether there is sufficient justification for imposing such stringent disclosure requirements on the smallest businesses. In the U.S., where private firms are not required to disclose financial statements, very few choose to do so voluntarily. At least for the smallest firms, European policymakers should consider whether a similarly voluntary system could better support small firms and the broader economy.

This post comes to us from Joachim Gassen at Humboldt University of Berlin and Maximilian Muhn at the University of Chicago’s Booth School of Business. It is based on their recent paper, “Financial Transparency of Private Firms: Evidence from a Randomized Field Experiment,” forthcoming in The Journal of Accounting Research and available here.