Financial Disclosure and Innovation

• In Event: Corporate Disclosure and Corporate Governance

Abstract

We explore how cross-country differences in the extent of financial disclosure and corporate transparency impact innovative investment. There is strong evidence that the level of financial disclosure affects the cost and availability of external equity finance, which should, in turn, impact the real activities most dependent on such financing. Using a variety of proxies for disclosure and transparency across countries, we find that more transparency has a strong differential impact on long-run rates of R&D investment in sectors that are more reliant on external financing and in sectors with a higher natural innovative intensity. The connection between transparency and R&D is strongest in countries with strong legal and regulatory enforcement, but our findings are not an artifact of the positive correlation between disclosures and other institutional factors that may affect innovative investment, such as financial market development and intellectual property protection. In addition, we find that time series shocks to the disclosure environment (proxied by the initiation of insider trading enforcement) lead to substantial increases in R&D investment, where again the effects are strongest in industries most reliant on external finance. Our findings directly link financial disclosure and corporate transparency with the external-finance dependent investments that drive economic growth.

Authors

• James R Brown, Iowa State University

• Gustav Martinsson, Institute for Financial Research (SIFR)