“Financial Reporting Quality and Productivity Dispersion” by Dr. Rebecca N. HANN
Dr. Rebecca N. HANN
Associate Professor and KPMG Faculty Fellow
Robert H. Smith School of Business
University of Maryland
Prior research documents large, persistent differences in productivity across businesses, suggesting the presence of market frictions that impede the efficiency in which resources are allocated from low to high productivity firms. We posit that high-quality financial reporting can mitigate one such friction—information frictions arising from firms and market participants having asymmetry information about firms’ productivity.
Using a large sample of firms in the manufacturing sector, we find that the sensitivity of exit as well as capital and labor growth to productivity is higher for firms in the higher-quality financial reporting industries. We further find that industries with higher-quality reporting tend to have smaller within-industry productivity dispersion, with this relation stronger for industries with a greater need for external capital. These findings suggest that financial reporting quality has real effects at the macro level, with higher reporting quality mitigating information frictions, thereby facilitating more efficient reallocation of resources and hence reducing productivity dispersion.