The Real Consequences of Corporate Transparency: Evidence from R&D Activity

Abstract

Corporate transparency reduces information asymmetries between firms and capital markets, but increases the costs associated with information leakage to competitors. We evaluate the net effects of a country’s overall information environment by focusing on innovation, an economically important activity characterized by both high information asymmetries and potentially severe proprietary costs. Focusing on cross-country differences in the availability of firm-specific information to corporate outsiders, we find significantly higher rates of R&D investment in richer information environments. The information environment disproportionally affects R&D activity in sectors more reliant on external finance, indicating that transparency facilitates innovation by reducing information costs. We draw similar inferences by studying quasi-experimental shocks to the information environment arising from the first prosecution of insider trading and introduction of transparency-specific securities regulations in the European Union. Our work directly connects an economy’s transparency environment with the innovative activities that drive growth, and highlights unexplored economic consequences of transparency-related security market reforms.