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

Tingting Liu, Yu Liu, Barkat Ullah, Zuobao Wei and Lixin Xu ()

Journal of Corporate Finance, 2021, vol. 66, issue C

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.

Keywords: Audited financial statements; Transparency; Private firms; Corruption obstacles (search for similar items in EconPapers)
JEL-codes: D73 G32 M42 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jcorpfin.2020.101829

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