Financial Reporting Quality and International Trade

This paper examines the effects of financial reporting quality on exports and imports. Financial reports provide valuable information to trading partners and thus may affect international trade. I begin by using survey data from executives to measure accounting quality and conduct country-sector-level analyses. I find that a one standard deviation increase in financial reporting quality in a country is associated with increases in manufacturing exports and imports of 3.6 percent and 4.5 percent, respectively. I then exploit a reporting regulation change in China and use administrative firm-level international trade data to conduct differences-in-differences and triple-difference analyses. These results show that treated firms export 15.3 percent more after the financial reporting reform. They also export to more countries and export more types of goods after the reform. Next I provide evidence for potential mechanisms for these effects. Specifically, improvements in financial reporting quality (i) facilitate communication among people of different cultures, (ii) decrease information asymmetry between trade partners, and (iii) help firms raise external capital. This paper extends understanding of the real economic effects of financial disclosure and provides a potential link between information transparency and global economic growth.