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
Date Written: December 8, 2020
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: Suggested Citation