The Economic Consequences of Disclosure Regulation: Evidence from Online Disclosure of Corporate Governance Practices in U.S. and Canadian Markets

Abstract

Following numerous accounting and financial scandals, there has been a trend on the part of regulatory bodies to encourage wider disclosure of corporate governance practices (CGP). In USA, the Sarbanes-Oxley Act of 2002 (SOX) requires public disclosure, via corporate investor relations websites, of specific information relating to governance practices. The Securities and Exchange Commission (SEC) approved corporate governance rules require companies with listed securities on the New York Stock Exchange to disclose corporate governance practices on their websites (NYSE, 2003). In contrast, the use of the Internet to disclose CGP is still voluntary in Canada. The Toronto Stock Exchange (TSX) requires listed companies to comply or explain with the corporate governance practices' (SCGP) guidelines only in the annual report or in the proxy circular. In this unique setting, I provide evidence that online disclosure of corporate governance practices differs between the United States (U.S.) and Canada, two otherwise similar business environments with different legal regimes. I find that the extent of corporate governance practices disclosures is higher in the U.S relative Canada suggesting that regulation force firms to maintain a higher level of transparency. Further, I find that the association between the extent of disclosure of governance practices on corporate website and stock liquidity is more significant in the US market. These findings are consistent with the externalities justifications of disclosure regulation. This study contributes to the debate on the economic consequences of disclosure regulation.

Keywords: Corporate Websites, Content analysis, Liquidity, voluntary disclosure, Mandatory Disclosure

JEL Classification: D82, G14