Do More Transparency & Disclosure Necessarily Enhance Firm Performance?

The present paper provides new evidence that the introduction of transparency and disclosure rules may not necessarily boost firm performance. Focusing on the introduction of the Transparency and Disclosure (T&D) reforms initiated in Russia in 2002, we use data on staggered implementation of the reform by two types of Russian firms over 2003-07: firms listed only in Russian domestic stock exchanges and firms that listed both in domestic and various foreign stock exchanges prior to the reform. We find new evidence that the reform negatively impacted operating performance (i.e., EBIT/Assets) of Russian only domestic-listed firms, whereas had some positive impact on their valuation (e.g., Tobin’s Q). Weak tax enforcement in the pre-reform period made it possible for managers to inflate earnings, which was no longer possible after the T&D reform was implemented. Further analysis showed that state-controlled domestic Russian firms experienced a drop in EBIT and did not experience any improvement in market valuation in the post-reform era. In contrast, better governed Russian firms did not experience a drop in EBIT and they were the only ones to experience significantly higher market valuation in the post-reform era.