The dark side of transparency in developing countries: The link between financial reporting practices and corruption

Authors

Tingting Liu
Yu Liu, The University of Texas Rio Grande Valley
Barkat Ullah
Zuobao Wei
Lixin Colin Xu

Document Type

Article

Publication Date

2-2021

Abstract

This paper examines the impact of financial reporting practices on corruption obstacles for about 150,000 firms across 143 mostly developing countries from 2006 to 2019. We document a strong positive relationship between the production of audited financial statements (AFS) and corruption obstacles (CO) faced by the firm. We argue that in a corrupt business environment, rent-seeking bureaucrats use the credible financial information to optimize their bribe demands. Our baseline results remain robust after addressing endogeneity concerns. We further show that country-level institutional quality has a moderating effect on the AFS-CO relation. The evidence from surveying entrepreneurs also provides qualitative support for our empirical findings. Our study sheds light on a previously under-explored adverse consequence of transparency - exposure to corrupt bureaucrats where institutions are weak.

Comments

Original published version available at https://doi.org/10.1016/j.jcorpfin.2020.101829

Recommended Citation

Liu, T., Liu, Y., Ullah, B., Wei, Z., Xu, L.C., 2021. The dark side of transparency in developing countries: The link between financial reporting practices and corruption. Journal of Corporate Finance 66, 101829. https://doi.org/10.1016/j.jcorpfin.2020.101829

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Publication Title

Journal of Corporate Finance

DOI

10.1016/j.jcorpfin.2020.101829