Effect of Increased Disclosure on Firm Financing: An Assessment of the Impact of Clause 49 in India

60 Pages Posted: 2 Feb 2020

See all articles by Sarmistha Pal

Sarmistha Pal

University of Surrey; IZA Institute of Labor Economics

Zoya Saher

Queen Mary University of London; University of Surrey

Date Written: January 9, 2020

Abstract

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

Pal, Sarmistha and Saher, Zoya, Effect of Increased Disclosure on Firm Financing: An Assessment of the Impact of Clause 49 in India (January 9, 2020). Available at SSRN: https://ssrn.com/abstract=3507852 or http://dx.doi.org/10.2139/ssrn.3507852

Sarmistha Pal (Contact Author)

University of Surrey ( email )

Stag Hill
Guildford, England GU2 7XH
United Kingdom
01483 683995 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Zoya Saher

Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom
E14NS (Fax)

University of Surrey ( email )

Stag Hill
Guildford, Surrey GU2 5XH
United Kingdom

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