Forecasting liquidity needs is crucial for small firms. Holding too little cash can force costly emergency financing or asset sales, while holding too much cash ties up resources that could be better used for investment or dividend payments. Striking the right balance is not easy, especially for small firms that typically face greater uncertainty and have fewer internal resources for risk assessment.
In our forthcoming article, “Peer Financial Reports and Corporate Cash Policy” (European Accounting Review), we study how mandatory financial reporting by industry peers helps small firms make better liquidity management decisions. We find that peer disclosures provide critical information about common risks and growth opportunities, ultimately shaping firms’ cash policies.
Our results show two key patterns. First, small firms operating in riskier industries hold less cash when more of their peers are required to disclose financial information. This suggests that firms learn about common liquidity risks from peer reports, enabling them to reduce precautionary cash buffers without increasing risk exposure. Second, small firms hold more cash in industries with greater growth opportunities when peer reporting is more extensive, indicating that firms use this information to anticipate and prepare for future investments.
These findings highlight the important role of financial reporting regulation not just in informing investors, but also in improving operational decisions within firms themselves. By facilitating information spillovers among peers, mandatory reporting can enhance the ability of small firms to optimize their liquidity management in response to industry-specific risks and opportunities.
The link to the article is: https://www.tandfonline.com/doi/full/10.1080/09638180.2025.2488344
