The market response to mandatory disclosure of payments to foreign governments

This study examines how the equity market responds to the mandated disclosures made under the Canadian Extractive Sector Transparency Measures Act (ESTMA). We studied a sample of 1,559 company-year-country disclosures from 937 extractive firms listed, or conducting business, in Canada between 2016 and 2018, and controlled for corruption perception and bribe indices in the host country. We found that ESTMA disclosures are associated with a negative market reaction, implying that the market perceives a net loss to firms as a result of the costs of compliance and risks associated with ESTMA. It appears that the reaction is stronger and more negative for ESTMA reports that provide more information, as well as for firms that report higher payments than expected. Furthermore, we have found that the ESTMA disclosures garner a stronger market reaction for firms that are more prone to corruption or have weak governance. This study contributes to the important discussion regarding the use of transparency measures to address the issues related to human rights in the business environment. Our results confirm that transparency is costly for shareholders, and it is, therefore, important for policymakers to consider the costs, benefits, and potential unintended consequences of their measures.