Private and Public Disclosures in Countries with Weak Institutional Environments: Evidence from Shanghai-Hong Kong Connect
47 Pages Posted: 22 Jun 2017 Last revised: 25 Oct 2017
Date Written: June 12, 2017
I study how firms enhance the credibility of voluntary disclosure when the enforcement institutions that deter managers from engaging in cheap-talk are weak. Using China, a classic example of such a market, I examine the effect of a market liberalization pilot program on affected firms’ disclosure policies. I find that affected firms increased private disclosure (corporate access and private dial-ins) in anticipation of the program’s implementation, but find no changes in public disclosure (press releases and management forecasts). Firms that increased private disclosure experienced an increase in foreign institutional holdings after the implementation and exhibited lower volatility and higher stock returns and foreign holdings, during a subsequent market crash. Overall, the results suggest that voluntary disclosure supports investor confidence even in markets without strong enforcement institutions, albeit through private (instead of public) channels.
Keywords: private disclosure, reputation, credibility, institutional investors, market liberalization
JEL Classification: F61, G01, G23, G38, M41
Suggested Citation: Suggested Citation