The Value of Corporate Transparency

The project will measure the information disclosure quality of Chinese public firms and examine its economic implications. The Chinese capital market is well known for its lack of transparency and one of the often-mentioned reasons for the lackluster performance of the Chinese stock market is that the financial statement disclosures by the public firms are not trustable. In fact, Li and Shroff [2011] show that China ranks in the bottom quartile of the more than 40 countries they study in terms of financial reporting and disclosure quality.

The objectives of the project are as follows.

-     Design a comprehensive measure of information disclosure quality for Chinese public firms.

-     Examine the research question—Do more transparent financial reporting and information disclosure add value to firms in China by lowering cost of capital?

-     Address the research question—How does the financial reporting quality of the different sectors of the Chinese capital market affect the inflow of foreign capital?

This project will deliver practical implications:

First, given the growing importance of the Chinese economy, understanding firm behavior in China is of significant importance for understanding the global economy. For instance, when multinationals enter into the Chinese market, do they lower their financial reporting standard, become less transparent or even corrupted? Answers to these questions can shed light on economic theories as well as guide business practices.

Second and perhaps more importantly, there’s no readily available measure of Chinese firm information disclosure quality for academic researchers or practitioners. The ShenZhen Stock Exchange published some measures of corporate governance quality for firms listed in SZSE, but they are rather ad hoc and do not have research-based evidence for support.