Firm-Level Transparency in the Former East Bloc: Empirical Evidence from the Baltic Region

Abstract

Research has established that financial disclosures are critical for the functioning of an efficient capital market. The role of disclosure may be especially important in newly-democratized nations that historically lack the tradition of transparency in financial information. This is the first study to systematically examine financial disclosure practices of firms from the Baltic states of Estonia, Latvia, and Lithuania. Using hand-collected data to form two distinct measures of disclosure, we assess the differences in disclosure practices between Baltic firms and a matched sample of firms from the Nordic region (specifically, Denmark, Finland, and Sweden). Our results show that the financial transparency level is lower in Baltic firms than in Nordic firms. The results are more pronounced for the second and broader disclosure measure that incorporates not only financial transparency but also disclosures about ownership and governance. We further investigate economic consequences (i.e., stock price volatility) of variations in disclosure in these two regions. We find that it is only the broader measure of disclosure that relates negatively to stock price volatility in the Baltic countries. In contrast, in the Nordic countries, both measures of disclosure are significantly negatively associated with stock price volatility. Our study should be of interest to investors, firm managers, and regulators in the Baltic countries as well as other emerging markets. These countries face challenges in attracting foreign capital. Increasing the overall level of financial transparency has the potential to help these countries attract foreign investment, allocate capital more efficiently, and foster economic growth.