Liquidity risk or growth opportunities? Disentangling the learning effects of mandated financial reports : Evidence from European private firms

Mandated financial reports allow industry participants to learn about liquidity risk factors and growth opportunities. While learning about liquidity risk factors reduces uncertainty and thus discourages cash accumulation, learning about new profitable projects leads to the opposite prediction since it triggers cash accumulation as a financing vehicle. In this study, we benefit from Europe’s mandatory reporting regulations and use threshold-induced variation in the percentage of mandated firms in a given industry to test which learning channel predominates. We find that extensive reporting mandates are positively associated with corporate cash holdings at both industry and firm levels, in line with a stronger impact of the growth opportunity channel. However, this effect reverses for financially unconstrained firms and those facing liquidity risks, highlighting the relevant role of learning about liquidity risks. Overall, by disentangling both learning channels, this paper contributes to a better understanding of the impact of financial reporting mandates on corporate policies