Title : Going Dark: Incentives for Private Firms Strategic Nondisclosure
We study the disclosure incentives of private firms and document a U-shaped
nondisclosure pattern in performance. Absent of capital markets incentives, private
firms tend to disclose intermediate news and conceal extreme good or bad
news. Our paper complements prior research on the disclosure incentives for
public firms by isolating proprietary disclosure costs of private firms. We exploit
the Italian low enforcement setting where we can observe the years before a firm
stops disclosing and investigate the manager’s choice to go dark (i.e., to stop disclosing).
In our sample about two percent of private firms strategically withhold
entire financial statements despite being audited and despite a mandatory filing
requirement. We find that firms at the distributional tails of annual sales growth
are significantly more likely to go dark. The result holds within the sample of
firms going dark mitigating concerns about self-selection. Higher ownership concentration increases the likelihood to stop disclosing by a factor of three. Firm
owners with a preference for financial privacy are about five times more likely to
go dark.