Does Transparency Stifle or Facilitate Innovation?

46 Pages Posted: 20 Sep 2014 Last revised: 21 Nov 2017

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK); Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students; Institute for Financial Research (SIFR)

Date Written: October 15, 2017

Abstract

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

Suggested Citation

Brown, James R. and Martinsson, Gustav, Does Transparency Stifle or Facilitate Innovation? (October 15, 2017). Swedish House of Finance Research Paper No. 15-16. Available at SSRN: https://ssrn.com/abstract=2498250 or http://dx.doi.org/10.2139/ssrn.2498250

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK) ( email )

Stockholm, 100 44
Sweden

HOME PAGE: http://https://www.kth.se/profile/gusma

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

Institute for Financial Research (SIFR) ( email )

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

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