Are different stock market transparency requirements associated with different accounting quality levels? An analysis of bonding effects on the German stock market

Most international stock exchanges distinguish solely between domestic and foreign issuers, whereas in Germany, issuers can choose between two market segments with diverse transparency levels: the Prime Standard and Non-Prime Standard segment. Transparency requirements for the Non-Prime Standard segment coincide with the minimum legal requirements of the EU-regulated market/regulated unofficial market. Companies that opt for a listing in the Prime Standard segment must comply with the higher transparency standards stipulated by the Frankfurt Stock Exchange. In our study, we find evidence indicating that companies that voluntarily bond themselves to these additional (private) regulations and tighter transparency requirements show higher accounting quality. Our results relate to papers that emphasize the importance of regulatory and legal environments as well as to papers discussing bonding effects on both the national and international levels. In summary, the unique German listing regime offers companies a setting in which to flexibly choose an appropriate level of transparency while considering the trade-off between the costs and benefits of specific listing requirements. For investors, the market segment is relevant for assessing the expected accounting quality level and the reliability of financial statements, respectively.