mand for disclosure in markets with greater legal protection of investors should be
greater, and market liquidity higher.^15
Emerging markets are by definition not well developed, and outside equity in-
vestors are not their primary sources of finance.^16 Therefore, both the external de-
mand for disclosure and market liquidity in emerging market countries are expected
to be lower than in developed economies.
(c) Disclosure and Liquidity: Empirical Evidence. A recent academic study strongly
supports the view that disclosure is positively associated with market liquidity.^17 The
study examines associations between measures of stock exchange disclosure and mar-
ket liquidity at the 50 member stock exchanges of the World Federation of Exchanges
(WFE) during 1998. It focuses on stock exchange disclosure systems (rather than actual
company disclosures) because this approach links stock exchange and government pol-
icy with desired outcomes related to market quality factors, such as liquidity. In the
study, “disclosure system” refers to: requirements for disclosure of company informa-
tion imposed by stock exchanges and government regulators, monitoring and enforce-
ment of disclosure requirements, and stock exchange mechanisms for disseminating and
making publicly available information about listed companies.^18 Using survey evidence
and data from public sources, the authors develop a measure of overall disclosure and
measures of disclosure system components such as enforcement, level of sensitive dis-
closures, and innovations in stock exchange and government disclosure systems.
The authors find that all disclosure measures are positively and significantly related
to market liquidity. This result is consistent with the theoretical prediction that higher
levels of disclosure reduce differences in information between corporate managers
and outsiders, and result in increased share liquidity. The analysis controls for the in-
fluences of: legal protection of investors, external financing, legal system (English law
versus non-English law), stock exchange size, whether the country is an emerging
market country, the CIFAR^19 index (an alternative measure of corporate disclosure),
analyst following, and importance of the media. Further, the authors find that, beyond
the influence of stock exchange disclosure level, only the emerging market and media
variables are significantly associated with market liquidity.
13.4 OVERVIEW OF AUTOMOBILE COMPANY DISCLOSURE SURVEY. Sections
13.4 through 13.9 present results from a survey of disclosure practices of six auto-
mobile manufacturing companies, focusing on: periodic financial reports, cash flow
13.4 OVERVIEW OF AUTOMOBILE COMPANY DISCLOSURE SURVEY 13 • 7(^15) Frost (2002) presents evidence supporting the view that legal environment influences company dis-
closures of forward-looking information in five countries. Ball, Kothari, and Robin (2000); Ali and
Hwang (2000); Hung (2000); Francis, Khurana, and Pereira (2001); Bushman, Piotroski, and Smith
(2001); Hope (2002); and several other studies provide evidence on the associations among institutional
characteristics and the properties of accounting numbers, financial transparency, and other accounting-
and auditing-related characteristics.
(^16) National governments have provided much of the financing in some countries, families and lenders
in others. For detailed discussion, see Beim and Calomaris (2001).
(^17) Frost, Gordon, and Hayes (2002).
(^18) The study focuses on stock exchange disclosure systems as related to domestic companies with eq-
uity listed in primary markets. To keep analysis manageable, it does not examine disclosure systems re-
lated to companies with equities traded over the counter or on other secondary markets.
(^19) Center for International Financial Analysis and Research, Inc.