Does Transparency Stifle or Facilitate Innovation?
46 Pages Posted: 20 Sep 2014 Last revised: 21 Nov 2017
Date Written: October 15, 2017
Corporate transparency reduces information asymmetries between firms and capital markets, but increases the costs associated with information leakage to competitors. We explore how a country’s information environment affects innovation, an activity characterized by high information asymmetries and potentially severe proprietary costs. Studying both long-run cross-country differences in the availability of firm-specific information to corporate outsiders, as well as quasi-experimental shocks to the information environment following transparency-enhancing security market reforms, we document significantly higher rates of R&D and patenting in richer information environments. The effects of transparency are strongest in industries that rely on external equity rather than bank debt, indicating that transparency facilitates innovation by reducing the information costs associated with arm’s-length financing. In contrast, transparency has no impact on physical capital accumulation, consistent with fewer information asymmetries in tangible assets. An economy’s information environment has important but heterogeneous effects on the nature and extent of real economic activity.
Keywords: Corporate transparency, R&D, Innovation, Insider trading, European Union, IFRS, International accounting, Security market regulation, Disclosure
JEL Classification: G14, G15, G18, M48, O30
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