Capital market development, the strength of financial reporting standards, and trust

• In Event: Financial Reporting and Capital Markets

Abstract

One of the most consistent results from the “Law and Finance” stream of literature is that disclosure standards are positively associated with capital market development. But these results are generally based on small-sample cross-sectional results. This paper exploits a country-year measure of the strength of financial auditing and reporting standards to better estimate how accounting and disclosure standards can affect capital market development. In a panel of over 1,400 country-years, representing over 140 countries from 2002-2013, I find that stronger financial reporting standards are positively associated with subsequent levels of equity market development, even when controlling for country-level effects and prior levels of market development. Additionally, public trust in politicians and managers complements stronger financial reporting standards in facilitating both equity and credit market development.

Author

• Henry L Friedman, University of California, Los Angeles