This article discussed survey results collected by the Berlin-based Transparency International. The formal survey, called “Transparency in Corporate Reporting consisted of 3 categories, reporting on anti-corruption programs, organizational transparency, and country-by-country reporting of revenue, expenses, and tax payments. After surveying 100 companies, the study showed that Chinese companies scored poorly overall. The car company Chery Automobile Co. received a score of 0 for all 3. Only one other company scored as poorly as Chery. The survey also found “eight of the 10 lowest scoring companies were Chinese. Out of the BRICS India overall received the highest scores.
As an investor companies with low transparency might cause hesitation on whether to invest. If a company’s corporate heads are taking money from the net income to pay for private homes or falsifying earnings, it can be near impossible to price adequately such a company. As the Chinese Government begins to crackdown on corruption, practices of poor transparency may hurt investments in low scoring companies who thought they had a viable product to generate revenue. With less faith in the US financial system, investment abroad may go to India due to transparency and proper reporting instead of China.
2 Responses to Transparency in BRICS
The investment research fund Muddy Waters conducts lots of equity research on Chinese companies, trying to verify their legitimacy for international investors. I think their research is entirely free. I watched an interview of their founder, Carson Block on CNBC years ago. It made me somewhat cynical about the legitimacy of many stocks in China. Several companies have been brought down as frauds by this team, including Sino-Forest Corporation. If I recall correctly, a couple years ago the Chinese equity markets got beat down as international capital was pulled out. I think this was in 2010 or so, after the markets had run up as a “safer” alternative to the US or Europe, as China’s economy continued growing.
Low transparency is always a turn off for investors. It is pretty astounding that 8 of the 10 lowest scoring companies were Chinese. As I mentioned in a comment on another post, 96% of Chinese trusted their national government and only 67% trusted their local government according to Howard Sanborn’s talk the other day in class. I am interested to look into whether the corruption is more frequently on a local or national level. Clearly, the Chinese people seem to think that it is more frequent with local officials.