Do More Transparency & Disclosure Necessarily Enhance Firm Performance?

Abstract

Prior literature posits that corporate governance reforms usually boost firm’s operating performance as well as market’s valuation. In this paper we show differential effect of corporate governance (henceforth, CG) reform on firm’s operating performance (e.g., EBIT/Asset) and firm’s market valuation (e.g., Tobin’s Q). In the context of Russian transparency and disclosure reform (henceforth, T&D reform) initiated by the Russian government in 2002, we find convincing evidence that these regulatory changes although had weak effects on firms’ market value ‐ had a pronounced negative impact on accountingbased measures of firm performance. We argue that this evidence suggests that pre-reform operating performance measures in Russia ‐ performance measures that are exposed to managerial discretion ‐ were largely “inflated” numbers. More importantly, our finding suggests that the Russian equity market was fully aware of this inflation. Consequently, Russian equity markets did not negatively react to sharp drop in operating performance of these companies. Further, a very weak effect on Tobin’s Q suggests that Russian T&D reform did not do enough to alleviate agency conflicts that could have potentially lead to significant increase in firm value.