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Financial Reporting Quality and Economic Growth

We investigate whether financial reporting quality facilitates economic growth. Our hypothesis is that better reporting quality improves project identification and selection, and lowers the cost of capital, translating into faster growth. Based on the premise that information uncertainty exacerbates decision making difficulty and agency problems, and that reporting quality mitigates these problems, we predict and find that high information uncertainty industries grow disproportionately faster in countries with better reporting quality. Specifically, we find that high information uncertainty industries grow between 0.12% and 0.22% faster in countries with high reporting quality. Additional evidence using International Financial Reporting Standards (IFRS) as an exogenous shock to reporting quality supports our hypothesis.