Disclosure and Competition for Capital

We study the relation between disclosure and competition for capital, using Moody's 2010 recalibration of the municipal rating scale. On a relative basis, the recalibration advantaged highly upgraded issuers and disadvantaged lowly upgraded issuers. We develop a model to show that for disadvantaged issuers, the recalibration exacerbates a potential conflict between social welfare and government officials' personal preferences. Higher quality disclosures can mitigate this conflict. Empirically, we find that the disadvantaged issuers provide timelier and more frequent financial statements after the recalibration, particularly when those issuers face relatively intense competition for capital. This evidence supports the idea that a competitive disadvantage in raising capital can motivate issuers to improve disclosure quality