NCPA - National Center for Policy Analysis

U.S. Ranks First In Accounting Transparency

July 24, 2002

A recent study demonstrated that despite our current corporate accounting scandals, U.S. firms keep the world's cleanest books. And it concludes that accuracy in accounting has helped drive investment in U.S. equity markets.

So foreign investors who have begun pulling money out of U.S. markets to reinvest it at home or in other countries may be jumping from the frying pan into the fire.

Researcher Utpal Bhattacharya, of Indiana University, and colleagues Hazem Daouk and Michael Welker, reviewed the financial records of 58,000 companies in 34 countries for the 1986 to 1998 period and ranked them by three negative categories: the tendency to smooth out large swings in earnings, delays in announcing losses, and pumping up profits and downplaying losses.

  • U.S. corporate financial statements showed up most poorly in the first category -- outranked by five other nations.
  • But U.S. firms were tops in overall transparency -- followed by Norway, Portugal and Brazil.
  • Greece and South Korea ranked as the least transparent.
  • And Japan ranked a lowly 29th in transparency.

The researchers found that financial transparency improves trade -- accounting for a five percent boost in annual trade among the best 25 percent of the nations studies. Conversely, they found, capital costs in countries with low transparency are as much as 3 percent higher.

Source: Joseph Guinto, "Which Nation's Accounting Is Cleanest? Surprise, It's U.S.," Investor's Business Daily, June 24, 2002; based on Utpal Bhattacharya, Hazem Daouk and Michael Welker, "The World Price of Earnings Opacity," Working Paper, Indiana University, 2002, and Otpal Bhattacharya and H. Daouk, "The world price of insider trading," Journal of Finance, 2002.


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