We examine the relationship between country-by-country disclosures and the internal information environments of multinational entities (MNEs). We argue that the introduction of U.S. country-by-country reporting (CbCR) increases affected firms’ need for effective internal information flows, as country-specific information is not readily available for disclosure. However, the disclosure mandate simultaneously adds complexity to firms’ reporting environments. Using a difference-in-differences design, we find that firms affected by U.S. CbCR make more efficient investment decisions, utilize existing resources more efficiently, and report fewer financial restatements than firms not affected by the mandate. These effects are concentrated in the first year following the introduction of U.S. CbCR. Our findings are robust across various placebo tests and alternative research designs. Supplemental regression discontinuity analyses reinforce our main results. Moreover, we find that improvements in internal information quality are concentrated in accounting items directly tied to U.S. CbCR, suggesting that firms improve information flows to meet the mandate’s specific disclosure requirements. Finally, we show that our findings depend on disclosure practices and organizational complexity prior to the mandate. Our results suggest that U.S. CbCR prompts MNEs to alter their internal information processing structures, improving financial reporting and operational efficiency.
