“Foreign Trade Liberalization and Corporate Financial Disclosure” by Shang-Jin Wei
Does a positive growth shock encourage a firm to improve its financial disclosure voluntarily? The answer helps to gauge the strength of market forces as a source of voluntary corporate governance reform. A challenge to empirical tests is that both firm growth and corporate disclosure are endogenous, and the causality can also go from better disclosure to better growth opportunity. To address this challenge, we develop a methodology that makes use of an exogenous source of a firm's growth opportunity – changes in the trade policies of other countries that the firm is unable to influence. We examine 4061 firms in 48 countries during 1992-2005, and find supportive evidence that increased growth opportunities indeed promote better corporate disclosure, especially in industries that depend heavily on external financing.