Did Clause49 Make All Indian Firms Less Opaque? Implementation and Impact of Increased Disclosure
62 Pages Posted: 2 Feb 2020 Last revised: 7 Feb 2021
Date Written: January 30, 2021
Exploiting the exogenous variation in information disclosure around the 2000 introduction of the Clause 49 regulations in India, an important emerging economy, the paper examines its implementation and the resultant impact of increased disclosure on corporate financing choices. Clause 49 regulations had necessitated domestic listed Indian firms to disclose reliable information, among others, and was completed by 2006. We first document that these regulations were successful to reduce information asymmetry, especially after its completion in 2006. Second, difference-in-difference estimates suggest that this increased disclosure had led to a significantly lower (higher) reliance on debt (equity) among treated domestic listed (relative to cross-listed who remained largely unaffected) firms. Further the share of bank loans fell, indicating a growth of public debt after increased disclosure. The debt reduction effect was evidently more pronounced after 2006, highlighting the lower processing costs of disclosed information when everyone started disclosing, even if partly, that had lowered the cost of capital. Important exceptions were the predominantly family owned, more opaque and risk-averse firms affiliated to business groups, who continued to have an easy access to internal capital of the group.
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