06 Dec 2011Working Paper Summaries

What Impedes Oil and Gas Companies’ Transparency?

by Paul Healy, Venkat Kuppuswamy and George Serafeim

Oil and gas companies face asset expropriations and corruption by foreign governments in many of the countries where they operate. In addition, most of these companies operate in multiple host countries. What determines their disclosure of business activities and hence transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim examine three forms of disclosure costs that oil and gas managers could potentially consider. Both the US government and the European Union are currently considering laws that would require oil and gas companies to disclose information about operations in host countries. Key concepts include:

Competitive risks are an important factor underlying differences in oil and gas firms' disclosure ratings across the host countries in which they operate.
Requiring disclosure of payments to foreign governments is unlikely to increase proprietary costs for oil and gas companies.
Mandating disclosures about the performance of oil and gas companies in host countries, however, is likely to increase proprietary costs, particularly risk of expropriations and costs related to product market competition.
Companies that are coming from more corrupt home countries tend to be less transparent about their payments to host country governments.

Author Abstract

We examine determinants of oil and gas companies' transparency in reporting on business activities in host countries where they operate. We find that our index of transparency across host countries is lower the more corrupt the host country, the higher the number of nationalizations in that host country in the past, and the fewer the number of oil and gas companies operating in the host country. The results of additional tests are consistent with the risk of expropriation being a barrier to information disclosure about firm performance. In contrast, we find no evidence that disclosure of government payments is related to proprietary costs. Moreover, holding the host country constant we find that firms coming from more corrupt home countries are less transparent about their government payment.