The Market Response to Mandatory Disclosure of Payments to Foreign Governments under the Extractive Sector Transparency Measures Act

Abstract

This paper examines the equity market response to mandated disclosures made according to the Extractive Sector Transparency Measures Act (ESTMA). Using a sample of 1,559 company-year-country filings from 937 extractive firms between 2016 and 2018, we find that ESTMA disclosures are associated with a significantly negative market reaction. We also find that investors react more negatively to ESTMA disclosures from firms with lower perceived transparency, firms that make payments to more corrupt host countries, firms with higher information asymmetry, and firms with disclosures under the Extractive Industries Transparency Initiative (EITI). Consistent with results from prior studies of other transparency measures outside of Canada, ours indicate that the overall impact of ESTMA is negative for an average firm. Thus, we suggest that the costs of increased transparency that firms internalize from the enactment of ESTMA exceed the benefits. There is a global trend in which countries have adopted or plan to adopt transparency measures to combat corruption. These transparency measures differ widely in their approach and scope, therefore, our results provide an important insight to regulators, investors, and civil societies.