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Corporate Transparency, Financial Development and the Allocation of Capital: Empirical Evidence

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  • AHSAN HABIB

Abstract

There is controversy regarding the role of financial development in promoting economic growth. Lucas (1988) suggests that the role of financial intermediation in economic growth has been very badly over‐stressed in the popular and professional discussion. Levine et al. (2000), on the other hand, show that in a cross‐country setting the exogenous component of financial intermediary development is positively and robustly linked to economic growth. Although empirical methodologies to investigate the finance‐growth nexus have been refined, there is a lack of understanding about the exact mechanisms through which the financial system could affect economic performance in the real sector. Wurgler (2000) investigates one such mechanism of economic growth: whether capital is allocated efficiently. He then empirically shows that countries with well‐developed financial architecture improve capital allocation. This article extends Wurgler (2000) by investigating the role of an important economic institution, the financial reporting system, on the efficiency of capital allocation. Financial reporting provides the primary source of independently verified information to the capital providers about the performance of managers and facilitates efficient resource allocation decisions. Results show that financial transparency is positively and significantly related to capital allocation efficiency. Further, this result holds after controlling for the impact of stock price synchronicity, state‐owned enterprises and investor protection rights.

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  • Ahsan Habib, 2008. "Corporate Transparency, Financial Development and the Allocation of Capital: Empirical Evidence," Abacus, Accounting Foundation, University of Sydney, vol. 44(1), pages 1-21, March.
    • Handle: RePEc:bla:abacus:v:44:y:2008:i:1:p:1-21
    DOI: 10.1111/j.1467-6281.2007.00246.x
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    1. Luigi Zingales, 2003. "Commentary on More on finance and growth: more finance, more growth?\\"," Review, Federal Reserve Bank of St. Louis, vol. 85(Jul), pages 47-52.
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    Cited by:

    1. Castro, F. Henrique & Santana, Verônica, 2018. "Informativeness of stock prices after IFRS adoption in Brazil," Journal of Multinational Financial Management, Elsevier, vol. 47, pages 46-59.
    2. Hedy Jiaying Huang & Ahsan Habib & Sophia Li Sun & Ying Liu & Huiting Guo, 2021. "Financial reporting and corporate innovation: a review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5439-5499, December.
    3. Omaima Hassan & Claire Marston, 2010. "Disclosure measurement in the empirical accounting literature - a review article," Accountancy Discussion Papers 1004, Accountancy Research Group, Heriot Watt University.
    4. Habib, Ahsan & Ranasinghe, Dinithi & Muhammadi, Abdul Haris & Islam, Ainul, 2018. "Political connections, financial reporting and auditing: Survey of the empirical literature," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 31(C), pages 37-51.
    5. Geng, Chengxuan & Cui, Zongying, 2020. "Analysis of spatial heterogeneity and driving factors of capital allocation efficiency in energy conservation and environmental protection industry under environmental regulation," Energy Policy, Elsevier, vol. 137(C).
    6. Mansur, Alfan & Nizar, Muhammad Afdi, 2019. "Mengukur Perkembangan Sektor Keuangan di Indonesia dan Faktor – Faktor yang Mempengaruhi [Assessing the Measurement and Determinants of Financial Sector Development in Indonesia]," MPRA Paper 96265, University Library of Munich, Germany, revised 30 Sep 2019.
    7. Romero-Ávila, Diego, 2011. "Information disclosure, banking development and knowledge-driven growth," Economic Modelling, Elsevier, vol. 28(3), pages 980-990, May.
    8. Jiang, Haiyan & Habib, Ahsan & Wang, Snow, 2018. "Real Earnings Management, Institutional Environment, and Future Operating Performance: An International Study," The International Journal of Accounting, Elsevier, vol. 53(1), pages 33-53.
    9. Yagli , Ibrahim & Cetenak , Emin Huseyin, 2023. "Financial Development and Capital Allocation Efficiency Nexus: Do Sources and Dimensions of Financial Development Matter?," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 48(2), pages 83-103, June.

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