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Financial Disclosure , Corporate Transparency , and Innovation

We explore the connection between the country-level financial disclosure environment and innovative investment. There is strong evidence a more transparent disclosure environment lowers the cost and increases the availability of external equity finance, which should, in turn, impact the real activities most dependent on such financing. Using a variety of proxies for disclosure and transparency across countries, we find that more transparency has a strong positive impact on long-run rates of R&D investment in sectors that are more reliant on external financing and in sectors with a higher natural innovative intensity. These findings are not an artifact of the positive correlation between financial transparency and other institutional factors known to affect innovative investment. In addition, we treat the initiation of insider trading enforcement as a quasi-experimental shock to the disclosure environment and find substantial increases in R&D investment around the insider trading event, where again the effects are strongest in industries most reliant on external finance. Our findings link the disclosure environment with the external-finance dependent investments that drive economic growth.