4. Effects of Financial Accounting
Information on Economic
Performance
A growing body of evidence indicates that the development of
a country’s financial sector facilitates its growth (for example,
King and Levine [1993], Jayaratne and Strahan [1996], Levine
[1997], Demirguc-Kunt and Maksimovic [1998], and Rajan
and Zingales [1998]). Levine (1997) presents a framework
whereby a well-developed financial sector facilitates the
allocation of resources by serving five functions: to mobilize
savings, facilitate risk management, identify investment
opportunities, monitor and discipline managers, and facilitate
the exchange of goods and services. At the heart of these
theories is the role of the financial sector in reducing
information costs and transaction costs in an economy. In spite
of the central role of information in these theories, until
recently little attention has been given by empirical researchers
to the information environment per se in explaining crosscountry
differences in economic growth and efficiency.
In this section, we discuss research that explicitly examines
the role of a country’s corporate disclosure regime in the
efficient allocation of capital. Preliminary results from this
literature provide encouraging evidence of a positive relation
between the quality of a country’s corporate disclosure regime
and economic performance. Cross-country analyses are one