Effect of Increased Disclosure on Firm Financing: An Assessment of the Impact of Clause 49 in India
60 Pages Posted: 2 Feb 2020
Date Written: January 9, 2020
Using the 2000 introduction of the Clause 49 regulations in India as a natural experiment, we examine the impact of increased disclosure on firm financing choices. Clause 49 introduced transparency and disclosure rules, among others, and listed Indian firms were required to adopt it by 2006. Difference-in-difference estimates using firm-level panel data over 1996-2014 suggest that increased disclosure after 2000 has led to a greater (lower) reliance on equity (debt) among treated domestic listed (relative to cross-listed) sample Indian firms; but the effect was more pronounced after 2006 when most firms adopted the reform, even if partly. Cross-listed firms, however, remained largely unaffected by the reform, thus acted as our control group. We show that the reform improved earnings quality, reduced the information asymmetry and therefore lowered the cost of capital among most sample firms, except those affiliated to various business groups. These firms are more likely to be politically connected and continue to be opaque with greater reliance on debt, thus challenging the effective implementation of Clause49 regulations in a country with weak institutions.
Keywords: Increased disclosure, Clause 49, Firm financing, Business group firms, Political connection, Difference-in-difference model, India
JEL Classification: G32, G38, K20, O16
Suggested Citation: Suggested Citation