The role of financial reporting quality and quantity in government procurement: evidence from Japanese tenders

Overview

This study examines the relationship between financial reporting quantity and quality and outcomes in Japanese government procurement, utilizing transaction cost economics and principal-agent theory as theoretical frameworks. The research investigates whether enhanced disclosure improves contract success in competitive tenders and whether political connections attenuate the transparency-procurement relationship. The analysis focuses on Japanese listed companies' participation in central government tenders during 2020 and 2021.

Methods and approach

The research employs a dataset comprising 4,955 firm-years of listed companies that secured 6,870 central government tenders obtained from JETRO. Multiple regression specifications including probit, ordinary least squares, and tobit models were applied to assess disclosure effects. The analysis stratifies tenders into competitive and non-competitive categories and conducts subsample examinations differentiated by political connection status. Endogeneity concerns are addressed through instrumental variable estimation and propensity score matching as robustness checks.

Results

Empirical findings demonstrate that firms with greater financial reporting quantity and superior quality are significantly more likely to win contracts in competitive tender environments. This association is not observed in non-competitive tenders. The analysis reveals that political connections weaken the relationship between disclosure and procurement success, indicating a substitution effect wherein political influence reduces the informational value of formal transparency in contract acquisition.

Implications

The results suggest that enhanced financial reporting transparency can functionally improve fairness and efficiency in public procurement processes by reducing agency costs between government entities and bidding firms. The substitution effect of political connections underscores institutional vulnerabilities wherein informal influence mechanisms can override formal disclosure-based competition, creating equity and efficiency concerns in procurement systems. Policy implications point toward regulatory reforms designed to strengthen transparency mechanisms and curtail political influence in contracting environments where institutional context currently permits such substitution effects. The findings indicate that disclosure-based competition may broaden firm access to contracts and potentially strengthen public confidence in procurement integrity.