Corporate Transparency Improves For Foreign Firms in U.S. Markets

International companies that interact with U.S. markets are more transparent in their dealings, say Harvard Business School doctoral candidate Suraj Srinivasan.
by Cynthia Churchwell

Are international firms that interact with U.S. capital, labor, and product markets more likely to be more transparent than companies without those interactions? In this e-mail interview, HBS Suraj Srinivasan delves into a recent working paper on the subject and on what managers may take away from that research. Srinivasan's work with Tarun Khanna and Krishna Palepu furthers the debate regarding the effect of globalization on corporate governance systems. –Ed.

Churchwell: How do you define corporate and country transparency? Why are they of concern to practitioners and scholars?

Srinivasan: We define corporate transparency as the quantity and quality of information a company provides its various constituents including shareholders and other capital providers, suppliers, customers, employees, etc. In this paper, we measure this transparency using the corporate disclosures a company makes in its annual financial statements, primarily the annual report. For this we use the recently released transparency-and-disclosure scores provided by Standard and Poor's.

Q: What did you discover about the disclosure practices of foreign companies interacting with U.S. markets?

A: We find that market interactions with the U.S both at the company level and at the country level affect corporate disclosure practices of foreign companies. We studied interactions with the U.S. in product, labor, and capital markets.

The role of good information availability in accessing global product, labor, and capital markets is highlighted by our study.
— Suraj Srinivasan

We find that companies that have business operations in the U.S.; U.S. listing, and international equity ownership follow disclosure practices that are similar to those of U.S. companies. We also find that companies in countries with U.S. equity or direct investment in the company's home country and labor market interactions evidenced by business travel from the home country to the U.S follow U.S.-style disclosure practices. There is mixed evidence that a company's exports to the U.S. and the company's country's trade with the U.S. are negatively associated with the disclosure scores. Our results are broadly consistent with the hypothesis that cross-border economic interactions are associated with similarities in disclosure and governance practices.

Q: While analyzing corporate transparency and a firm's country of origin, did you find anything that surprised you?

A: We find it interesting to note the large within-country variation in disclosure practices, even in countries where the average disclosure level is low. While we confirm that companies that list in the U.S. have U.S.-style disclosure practices, we find it interesting (and perhaps not surprising) that even companies that are not listed in the U.S. but have operations in the U.S. follow the U.S. disclosure-and-transparency model.

Q: Were you able to arrive at a conclusion regarding whether it is transparency that encourages market interaction with the U.S. or vice versa?

A: As a matter of academic rigor, we do not at this stage of the research make a causal statement on this. However, we believe that multimarket interaction in product, labor, and capital markets with the U.S. that results when firms establish operations in the U.S. causes them to behave more like U.S. companies.

Q: In regards to transparency, what questions do you think managers should ask themselves when deciding what global opportunities to explore?

A: The role of good information availability in accessing global product, labor, and capital markets is highlighted by our study. One question managers could ask themselves is whether they are providing sufficient information for various market participants to assess them in the course of their business. For example, companies interested in tapping the global talent pool need to ensure that there is sufficient information available for potential employees to assess them.

About the Author

Cynthia Churchwell is a business information librarian at Baker Library, Harvard Business School, with a specialty in the international economy.