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

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 30, 2021

Abstract

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

Pal, Sarmistha and Saher, Zoya, Did Clause49 Make All Indian Firms Less Opaque? Implementation and Impact of Increased Disclosure (January 30, 2021). 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 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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