Property Rights Protection, Corporate Transparency, and Growth*

In countries with secure property rights, corporate transparency improves investment efficiency and increases growth by alleviating information asymmetry. However, in countries with insecure property rights, greater transparency can increase the risk of government expropriation. Therefore, some firms that would benefit most from transparency cannot take full advantage of it, as they set sub-optimal transparency levels. Using data from 59 industries in 69 countries, we find that in countries with weak property rights protection, industries that would benefit the most from transparency exhibit worse investment efficiency and grow slower compared to industries that can efficiently operate at minimal levels of transparency. _________________________________________ * Art Durnev, Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec H3A 1G5, Canada. Tel: (514) 398-5394. Fax: (514) 398-3876. E-mail:[email protected]. Vihang Errunza, Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec H3A 1G5, Canada. Tel: (514) 398-4056. Fax: (514) 398-3876. E-mail: [email protected]. Alexander Molchanov, Department of Commerce, Massey University, Private Bag 102 904, North Shore MSC, Auckland, New Zealand. Tel: +64 9 414-0800 ext. 9334. Fax: +64 9 441 8177. E-mail: [email protected]. We are grateful for helpful comments and suggestions by the editor, Lemma Senbet, anonymous referees, Henk Berkman, Stijn Claessens, Amrita Nain, Maria Petrova, Bernard Yeung, and the participants of the 2009 Darden International Finance Conference, Concordia University seminar, and Massey University seminar. Art Durnev’s research is supported by Institut de Finance Mathématique de Montréal (IFM2) and the Social Sciences & Humanities Research Council of Canada (SSHRC). Vihang Errunza’s research is supported by the Bank of Montreal chair in finance and banking, IFM2 and SSHRC. We thank Pat Akey for superb research assistance.