Property rights, R&D spillovers, and corporate accounting transparency in China

We explore how property rights protections across different regions in China affect the flow of proprietary information and managers' incentives to disclose details of financial and operating performance. Our focus on research and development spillovers as a proxy for information leakages to competitors allows an examination of whether or not opacity (low transparency) is employed as a mechanism to attenuate such leakages. We find that when the threat of proprietary information leakage is high, information reported by firms is opaque. This relation appears in regions suffering from weak intellectual property rights protections, but not in those with stronger property rights protections. After taking into account the incentive to protect sensitive information, we also document that firm value is no longer related to accounting transparency. Our focus on accounting opacity to protect proprietary information differs from the agency cost explanation of most prior work. Thus we provide evidence of a cost of enhanced disclosure along with new insights on specific channels through which institutional factors influence the costs and benefits of firm disclosure policies. ► We focus on an alternative explanation for opacity–to protect proprietary information. ► We explore how property rights protections in China affect disclosures. ► When the threat of information leakage is high, information reported is opaque. ► The effects we find are concentrated in regions with weak IPR protections. ► In a two-stage model we find that firm value is unrelated to accounting transparency.