Capital Market Development and Confidence in Disclosure Quality

Abstract

Using a survey-based measure that directly captures beliefs about disclosure quality (SFARS) in a panel with over 1,000 country-year observations, this study examines macro-level capital market consequences of confidence in disclosure quality. Supporting construct validity, SFARS is associated with prior measures of disclosure quality, tends to decline around accounting scandals, and tends to increase around corporate reforms. Evidence from panel regressions controlling for country effects, prior levels of market development, and other plausible determinants suggests that more positive beliefs about disclosure quality are associated with credit market development, but inferences associated with equity market development are sensitive to empirical specification and variable definitions. Additional analyses find little support for the effects of SFARS on capital market development varying with other macroeconomic or institutional features.

Keywords: confidence; disclosure quality; international accounting; equity market development; credit market development

JEL Classification: E22, G15, G18, G38, M41, M42, M48