FBA Seminar Series No.07/1415 – Disclosure as a Double-Edged Sword: Financial Constraints, Corruption, and Auditing

Economic agents, such as firm managers, creditors, as well as corrupt bureaucrats, use the information available to them to maximize their utilities. In this paper, we study the effects of accounting information disclosure through auditing on financial constraints and corruption obstacles faced by the firm. We analyze a large-scale World Bank Enterprise Survey (WBES) data collected from 2006-2014 for over 70,000 firms in 122 mostly developing countries, and find that disclosure can be a double-edged sword. On the one hand, audited firms exhibit significantly lower level of financial constraints than the unaudited firms. On the other hand, audited firms face higher level of corruption obstacles. We further find that in countries with private credit bureaus, auditing improves access to finance while reducing corruption obstacles. Conversely, in countries with government-owned public credit registries, auditing hinders access to finance while increasing corruption obstacles. We also examine the effect of disclosure on firm development and find that auditing has an overall significant and negative impact on firm growth. However, this negative effect is largely driven by firms in non-OECD countries. Non-OECD countries in general have less developed institutions and more corrupt governments. Information disclosure may be detrimental to firm development if firms operate in a corrupt business environment. These findings are further supported by our analyses employing the Heritage Foundation’s freedom indices, where we find that the beneficial effect of disclosure increases as a country’s property rights protection, freedom from corruption, and financial freedom improve.

JEL Classification: M42, G32, D73.

Date: October 24, 2014 (Friday)

Time: 10:30~12:00

Venue: Faculty of Business Administration, E22-1003

A Short Biography of Prof. Wei
Prof. Zuobao WEI serves as Associate Professor of Finance, Department of Economics & Finance of The University of Texas at El Paso, USA. Prof. Wei got his Bachelor of Science in Chemical Engineering at Guangxi University, China and Master of Engineering Management at Marriot School of Business, Brigham Young University, USA. He then got his Master of Arts in Economics and Ph.D. in Financial Economics in University of New Orleans, USA. He is also Chartered Financial Analyst since September 2002.