Does Verification of Internal Control over Financial Reporting Affect Voluntary Disclosure?

We investigate whether firms and investors view the presence of the audit of internal controls over financial reporting (ICFR verification) as enhancing the likelihood and credibility of voluntary disclosures. We do so by exploiting a recent amendment to Smaller Reporting Company Regulatory Relief and Simplification in 2018 that generated a sample of firms that are both exempt from mandatorily disclosing certain items in their periodic filings (i.e., move to a voluntary disclosure regime) and are subject to ICFR verification. By comparing this sample to firms that are not subject to ICFR verification but also voluntary disclosers, we find that firms subject to ICFR verification are more likely to voluntarily disclose exempt items. Further, a difference-in-differences design reveals that investors on average view ICFR verification as a substitute for loss of commitment when firms move from mandatory to voluntary disclosure regime but continue to disclose. However, investors do not view ICFR verification as a substitute for loss of information for firms that reduce disclosure, rather they penalize them. Taken together, our findings contribute to an ongoing debate about the costs and benefits of ICFR verification.