Born in the Shadows: The Lasting Effect of Informal Beginnings on Firm Financial Transparency

ABSTRACT

This paper examines whether firms' informal beginnings leave a persistent imprint on financial transparency after formalisation. Drawing on imprinting theory, we argue that the opacity norms, accounting capability deficits, and regulatory avoidance strategies developed during firms' informal beginnings persist following formalisation, systematically reducing the likelihood that informally founded firms adopt transparent financial reporting practices. Using World Bank Enterprise Surveys data from more than 200,000 formal firms in over 160 countries, we find that firms that began operations informally are 6.7 percentage points less likely to have externally audited financial statements, representing a 13% reduction relative to the sample mean. This result is robust to alternative model specifications, exclusion of influential countries, instrumental variable estimation, and sensitivity analyses based on unobservable selection bounds. Heterogeneity analysis further reveals that the effect is concentrated among firms in low‐ and middle‐income economies and manufacturing sectors, and attenuates with firm age, consistent with gradual organisational learning. In contrast, firm size and foreign ownership do not significantly mitigate the imprinting effect. Our findings suggest that policies aimed at promoting financial transparency cannot rely on formalisation alone. Instead, early‐stage incentives for formal registration, coupled with investments in improving institutional quality, are needed to prevent opacity norms from becoming embedded in firms' organisational structures.