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.
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
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Journal of Corporate Finance