A wealth of research has explored how financial and managerial reporting quality influences companies’ day-to-day decisions, from operations to investments. But what happens when firms face a major crisis? Can strong reporting systems—for example, those with rigorous procedures relating to finance and supply chain disclosures, and with few incidents of regulatory and fraud investigations—help firms adapt and recover more effectively? To date, little research has examined whether reporting quality shapes how well firms restructure after an unexpected shock. This paper tackles this question by investigating how firms’ pre-shock reporting quality influences their ability to regain productivity following a disruption.
The authors examine this question in the context of the 1999 Taiwan earthquake, which disrupted the supply chains of US high-tech manufacturing firms that relied on Taiwanese suppliers for semiconductors and other electronic components. The shock drove up the prices of inputs for these firms, while their competitors sourcing from elsewhere remained unaffected. The authors use a difference-in-differences: a statistical method that estimates the causal effect of a treatment or shock by comparing changes over time between an affected group and a similar but unaffected control group research design to compare firms that were and were not affected by the earthquake. They find the following:
- Following the earthquake, affected firms were more likely to incur restructuring charges, while also reducing spending on overhead, capital, and research. Affected firms did not significantly change their acquisition activity or workforce size. These changes are consistent with theory: because many competitors were unaffected by the earthquake, affected firms could not pass higher costs to consumers without risking market share loss and were instead prompted to adjust their operations.
- Firm-level total factor productivity (TFP): a measure of how efficiently a firm converts inputs (labor, capital, and materials) into output, capturing productivity improvements beyond changes in input usage increased by 10-11% for affected firms compared to unaffected firms following the earthquake, equivalent to a ten-percentile gain in productivity. This finding suggests that operational adjustments made in response to disruptions can drive significant productivity gains.
- Reporting quality drives these productivity gains. Affected firms with high reporting quality experienced significant increases in TFP, ranging from 11.3% to 12.6%. By contrast, affected firms with low reporting quality either saw no increases in TFP relative to unaffected firms or witnessed a much lower increase in TFP (5%) compared to firms with high reporting quality.
- The association between TFP and reporting quality only holds among firms that undertake restructuring or reduce investments following the earthquake. This suggests that superior accounting practices and enhanced disclosures are crucial for firms that actively manage their operations in response to shocks, potentially aiding in more effective decision-making and resource allocation.
This research highlights the critical role of reporting quality in shaping firms’ ability to respond productively to disruptive shocks. Firms with higher pre-shock reporting quality achieve greater increases in TFP, particularly when they engage in restructuring or strategic cost reductions. These findings suggest that high-quality accounting practices improve decision-making and resource allocation under crisis conditions. For policymakers, this underscores the importance of regulatory frameworks that promote robust financial reporting, as higher reporting quality enhances firm resilience and adaptability. For firms, the results indicate that investments in stronger internal information systems can yield long-term productivity benefits, particularly in industries vulnerable to supply chain disruptions and other external shocks.