Does Transparency Stifle or Facilitate Innovation?
Corporate transparency reduces information asymmetries between firms and capital markets, but increases the costs associated with information leakage to competitors. We evaluate the net effects of a country’s overall information environment by focusing on innovation, an economically important activity characterized by both high information asymmetries and potentially severe proprietary costs. Focusing on cross-country differences in the availability of firm-specific information to corporate outsiders, we find significantly higher rates of R&D investment in richer information environments. The information environment disproportionally affects R&D activity in sectors more reliant on external finance, indicating that transparency facilitates innovation by reducing information costs. We draw similar inferences by studying quasi-experimental shocks to the information environment arising from the first prosecution of insider trading and introduction of transparency-specific securities regulations in the European Union. Our work directly connects an economy’s transparency environment with the innovative activities that drive growth, and highlights unexplored economic consequences of transparency-related security market reforms.