Increased Disclosure and Firm Financing - Impact of Clause 49 Regulations in India

Abstract

Exploiting the large exogenous variation in information disclosure after the 2000 introduction of the Clause 49 regulations in India, the present paper examines the impact of increased disclosure on financing choices of listed Indian firms. Clause 49 regulations necessitated domestic listed firms to disclose reliable information and were adopted by all by 2006. We use cross-listed Indian firms as control group because they remained largely unaffected by Clause 49. Using difference-in-difference estimates, we document that increased disclosure after adoption of Clause 49 had led to a significantly lower (higher) reliance on debt (equity) among treated domestic listed (relative to cross-listed) firms in the full sample. The share of bank loans also fell, indicating a growth of public debt after 2006 adoption. These effects were more pronounced after 2006 as processing costs of disclosed information as well as cost of capital fell only after every firm started disclosing. Important exceptions were the predominantly risk-averse largely family-owned firms affiliated to business groups, whose financing choices remained unaffected even after adoption of Clause 49 regulations.

Keywords: Increased disclosure, Clause 49, Firm financing, Business group firms, Political connection, Difference-in-difference model, India

JEL Classification: G32, G38, K20, O16