The Consequences of Shifting Corporate Disclosure Enforcement from Public to Private in Weak Institutional Environments: Are Market Institutions Ready?

We examine the consequences of a regulatory reform that shifts corporate disclosure enforcement from public to private in a weak institutional environment. Contrary to the intent of the regulatory reform, we find no evidence that disclosure timeliness is increased after the reform, but we find that disclosure accuracy is decreased following the reform. Except for independent auditors, we find no evidence that the major market institutions, including independent directors, mutual fund managers and financial analysts, play any significant role in mitigating firms’ incentive to reduce disclosure quality after the reform. Nevertheless, the stock market correctly discounts the quality of corporate disclosure after the reform, consistent with market efficiency.