Does Corporate Transparency Contribute to Efficient Resource Allocation?*

This paper examines whether a country’s corporate transparency environment (which includes the quality of accounting information) contributes to efficient resource allocation. Specifically, we examine whether improved transparency allows firms to take advantage of global growth opportunities, building on the work of Fisman and Love (2004) and Rajan and Zingales (1998). Based on a cross-country study of 37 manufacturing industries from 37 countries, we provide three pieces of related evidence in support of this argument. First, we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs, after controlling for country-level economic and financial development. Second, we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development. This is consistent with the argument that industry-specific growth shocks are more likely to be similar for countries in comparable stages of economic development (GDP). Finally, when we extract the component of transparency that is due to a country’s institutions in place, we find both the predicted and the residual transparency components are associated with industry-specific growth rates. Taken together, our results are consistent with corporate transparency facilitating the allocation of resources across industry sectors. An additional analysis examines whether transparency positively affects the relation between a country’s realized growth rate and its ex ante growth opportunities estimated using the price-earnings ratio of global industry portfolios weighted by each country’s specific industrial mix. Confirming our earlier results, we find countries that exhibit more transparency display a stronger association between ex ante growth opportunities and realized ex post growth in real GDP per capita. In sum, our results support the argument that greater corporate transparency contributes to improved resource allocation and growth rates, over and above the previously documented effects of a country’s level of economic and financial development. Finally, our results also indicate that improved transparency can facilitate resource allocation and growth, even in countries with weaker institutions.