The economic consequences of disclosure regulation: evidence from online disclosure of corporate governance practices in the US and Canadian markets Online publication date: Mon, 09-May-2016
by Réal Labelle; Samir Trabelsi
International Journal of Auditing Technology (IJAUDIT), Vol. 2, No. 4, 2015
Abstract: There is a trend on the part of regulatory bodies to require firms to disclose their corporate governance practices (CGPs). In the USA, Sarbanes-Oxley requires this disclosure in the investor relations section of their website. In contrast to this rules-based approach, the use of the internet to disclose CGP is voluntary under Canada's principles-based approach. We use these two otherwise similar environments to compare the effect of rules-based versus principles-based CGP disclosure on market liquidity. Our tests are based on both regulation and voluntary disclosure theory. We find that the extent of CGP disclosures is higher in the USA relative to Canada. This suggests that stronger regulation and enforcement motivate firms to maintain a higher level of transparency. Further, we find that the association between the extent of disclosure and stocks liquidity is significantly higher in the USA. These findings are consistent with the externalities justification of disclosure regulation.
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