regulation should not impede competition and investor access to trading opportuni-
ties, and must pass the test of cost effectiveness.^10
International organizations such as the International Organization of Securities
Commissions (IOSCO) and the Organization of Economic Cooperation and Devel-
opment (OECD) are seeking to harmonize and improve disclosure standards. These
efforts assume that such initiatives will reduce the regulatory barriers to cross-border
capital raising efforts, and improve investor protection and market quality. IOSCO
has published international disclosure standards for cross-border offerings and initial
listings by foreign issuers (IOSCO, 1998), and a recent report by the Multidiscipli-
nary Working Group on Enhanced Disclosure (2001) notes that disclosure can play
an important role in maintaining capital market stability.^11
(b) Environmental Factors that Influence Disclosure and Market Liquidity. National
differences in systems of corporate governance and finance are associated with dif-
ferent levels of equity market development and information asymmetry, and there-
fore probably lead to different levels of demand for public disclosure by external par-
ties, and in turn, differences in market liquidity.^12
In the United States, the United Kingdom, and other English (common) law coun-
tries, equity markets are highly developed, share ownership is widely dispersed, and
investor protection is emphasized. France, Germany, and other countries with non-
English law systems rely more heavily on debt financing, equity cross-holdings, and
ownership by family members; banks and other members of interlocking shareholder
groups are closely informed about corporate financial position and activities. As a re-
sult, external demand for disclosure in these countries may be lower than in the
United States and the United Kingdom.^13
Related to the legal system are features of legal protection of investors, which
might be associated with differences in financing and ownership across countries.^14
These, in turn, are associated with different levels of equity market development, in-
formation asymmetries, and demand for information, implying that the external de-
13 • 6 CORPORATE FINANCIAL DISCLOSURE: A GLOBAL ASSESSMENT(^10) For discussion of this and closely related issues, see, for example, Cox (1999); Fox (1999, 2000);
Romano (1998, 2001); and Coffee (2002).
(^11) The Multidisciplinary Working Group was formed in June of 1999 to provide advice to its spon-
soring organizations on steps that would advance the state of financial institutions’ disclosures of finan-
cial risks. The four sponsoring organizations are IOSCO, Basel Committee on Banking Supervision, In-
ternational Association of Insurance Supervisors, and the Committee on the Global Financial System of
the G-10 Central Banks.
(^12) For discussions of factors shaping accounting and disclosure development, see Choi, Frost, and
Meek (2002). Frost (1999) analyzes disclosure systems (rules, monitoring and enforcement, and infor-
mation dissemination) in effect at 50 international stock exchanges during 1998. In correlation analyses
involving 17 different disclosure system characteristics, she reports that (1) the extent of annual report
disclosure is positively associated with stock exchange size, and (2) the level of monitoring and en-
forcement is positively associated with extent of investor protection, external financing, and legal system
in the exchange’s country. Adhikari and Tondkar (1992) investigate institutional factors associated with
a stock exchange disclosure index based on 40 items. They find five country-specific factors to be sig-
nificantly related to the index: market size, dispersion of stock ownership, activity on the equity market,
degree of economic development, and type of economy.
(^13) See, for example, Organization for Economic Cooperation and Development (OECD) (1998b) and
Jacobson and Aaker (1993).
(^14) See La Porta et al. (1997).