Financial Reporting Quality and Economic Growth

61 Pages Posted: 11 Sep 2008 Last revised: 24 Jun 2010

See all articles by Feng Li

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 10, 2010

Abstract

We investigate whether financial reporting quality facilitates economic growth. Our hypothesis is that better reporting quality improves project identification and selection, and lowers the cost of capital, translating into faster growth. Based on the premise that information uncertainty exacerbates decision making difficulty and agency problems, and that reporting quality mitigates these problems, we predict and find that high information uncertainty industries grow disproportionately faster in countries with better reporting quality. Specifically, we find that high information uncertainty industries grow between 0.12% and 0.22% faster in countries with high reporting quality. Additional evidence using International Financial Reporting Standards (IFRS) as an exogenous shock to reporting quality supports our hypothesis.

Keywords: Financial reporting quality, corporate transparency, transparency, earnings quality, information uncertainty, IFRS, information asymmetry, economic growth

JEL Classification: O40, F30, D82, G15, M41, M43, M47

Suggested Citation

Li, Feng and Shroff, Nemit, Financial Reporting Quality and Economic Growth (May 10, 2010). Available at SSRN: https://ssrn.com/abstract=1265331 or http://dx.doi.org/10.2139/ssrn.1265331

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main St.
E62-679
Cambridge, MA MA 02142
United States
6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

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