The Dark Side of Transparency in Developing Countries: The Link between Financial Reporting Practices and Corruption

59 Pages Posted: 25 Jan 2017 Last revised: 24 May 2021

See all articles by Tingting Liu

Tingting Liu

Iowa State University

Yu Liu

University of Texas Rio Grande Valley

Barkat Ullah

Morgan State University

Zuobao Wei

University of Texas at El Paso

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Date Written: December 8, 2020

Abstract

This paper examines the impact of financial reporting practices on corruption obstacles for about 150,000 firms across 143 mostly developing countries from 2006–2019. We document a strong positive relationship between the production of audited financial statements (AFS) and corruption obstacles (CO) faced by the firm. We argue that in a corrupt business environment, rent-seeking bureaucrats use the credible financial information to optimize their bribe demands. Our baseline results remain robust after addressing endogeneity concerns. We further show that country-level institutional quality has a moderating effect on the AFS-CO relation. The evidence from surveying entrepreneurs also provides qualitative support for our empirical findings. Our study sheds light on a previously under-explored adverse consequence of transparency - exposure to corrupt bureaucrats where institutions are weak.

Keywords: audited financial statements; transparency; private firms; corruption obstacles

JEL Classification: M42, G32, D73

Suggested Citation

Liu, Tingting and Liu, Yu and Ullah, Barkat and Wei, Zuobao and Xu, Lixin Colin, The Dark Side of Transparency in Developing Countries: The Link between Financial Reporting Practices and Corruption (December 8, 2020). Journal of Corporate Finance, Vol. 66, 101829, 2021, Available at SSRN: https://ssrn.com/abstract=2905078 or http://dx.doi.org/10.2139/ssrn.2905078

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Yu Liu

University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX
United States

Barkat Ullah

Morgan State University ( email )

Baltimore, MD 21251
United States

Zuobao Wei (Contact Author)

University of Texas at El Paso ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-5381 (Phone)
915-747-6282 (Fax)

Lixin Colin Xu

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

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