Transparency,Liquidity, and Valuation: International Evidence on When Transparency Matters Most

We examine the relation between firm‐level transparency, stock market liquidity, and valuation across countries, focusing on whether the relation varies with a firm's characteristics and economic environment. We document lower transaction costs and greater liquidity (as measured by lower bid‐ask spreads and fewer zero‐return days) for firms with greater transparency (as measured by less evidence of earnings management, better accounting standards, higher quality auditors, more analyst following, and more accurate analyst forecasts). The relation between transparency and liquidity is more pronounced in periods of high volatility, when investor protection, disclosure requirements, and media penetration are poor, and when ownership is more concentrated, suggesting that firm‐level transparency matters more when overall investor uncertainty is greater. Increased liquidity is associated with lower implied cost of capital and with higher valuation as measured by Tobin's Q. Finally, a mediation analysis suggests that liquidity is a significant channel through which transparency affects firm valuation and equity cost of capital.     

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.     

碎片化与失灵：金融监管法的困境及其出路

实践中金融监管法的体系结构越来越碎片化,进而导致其在运行过程中往往出现法律失灵。以2008年金融危机为背景,通过梳理金融监管法与金融危机的关系,指出金融监管法陷入了“监管危机再监管”的治乱循环,其使命在于突破自身的局限。为了走出这一困境,因应部门法哲学化的趋势,针对金融监管法目前存在的研究不足,法哲学化将成为金融法领域新的理论增长点。     

Can Island Provide Liquidity and Price Discovery in the Dark?

On September 23, 2002, facing a regulatory mandate issued by the Securities and Exchange Commission, Island teminated the position of the Nasdaq 100 Index Tracking Stock (QQQ) on its book. While the market volume remained almost the same, Island's market share in the QQQ fell significantly. However, Island still dominates other trading centers in the price discovery process and volatility spillovers. The spreads on most trading centers became narrower after Island removed its quotes from the public view. The overall results suggest that the decrease in market transparency does not compromise market liquidity. Informed traders who provide price discovery in the QQQ are willing to sacrifice potential price improvements for the fast speed and reliable execution that Island offers, and are able to trade in the absence of displayed quotes.     

Transparency in Bank Risk Modeling: A Solution to the Conundrum of Bank Regulation

After financial disasters, financial risk models are often blamed for failing to provide adequate warning. The author argues that, in many cases, the models provided accurate warnings but were ignored by market participants who did not like what they said. The financial crisis of 2008–2009 was not the first time this has happened. The author describes similar but smaller debacles in 1994 and 1998 that had their roots in financial innovation that took place a decade earlier. In both cases, risk models warned that volatile securities would become impossible to hedge; but rather than exiting those positions as they should have done, some market participants simply ignored the flashing warning lights. Some current financial risk models have proven to be quite robust. Large commercial banks have mined their internal data to create empirical models of default probability that forecast accurately out of sample. Default models based on contingent claims analysis have been available for years, including some that use continuously‐traded equity and equity options prices. Hybrid models that combine empirical data‐mining and forward‐looking market‐based signals have been shown to provide reliable early warning signals about corporate credit risk. The author recommends making banks' data bases and risk models freely available to regulators, ratings agencies, and independent analysts. When provided with access to the findings of independent efforts to measure the riskiness of bank portfolios, public scrutiny and third‐party analysis would compel bank senior management to improve risk measurement and increase transparency. Banks would benefit by restoring market confidence in the quality of their books. Making risk models transparent could also help break the present impasse between regulators and financial intermediaries. It may be possible for markets to establish a standard for credit risk that is more robust and more trustworthy than the ratings‐based system that fell into disrepute after the 2008 crisis. This would be preferable to the present thrust of bank regulation, which proposes to apply the severest standards to bank ownership of risk, and threatens to dampen economic growth.     

Presidential Address: Issuers, Underwriter Syndicates, and Aftermarket Transparency

I model strategic interaction among issuers, underwriters, retail investors, and institutional investors when the secondary market has limited price transparency. Search costs for retail investors lead to price dispersion in the secondary market, while the price for institutional investors is infinitely elastic. Because retail distribution capacity is assumed to be limited for each underwriter‐dealer, Bertrand competition breaks down in the primary market and new issues are underpriced in equilibrium. Syndicates emerge in which underwriters bid symmetrically, with quantities allocated internally to efficiently utilize retail distribution capacity.     

Transparency,idiosyncratic risk,and convertible bonds

We first investigate the relationship among a company's information transparency, idiosyncratic risk, and return of its convertible bonds. The effects of a company's idiosyncratic risk on its equity's value volatility and its credit risk are also examined. The findings indicate that when a company discloses a significant amount of information, it is likely to have a higher idiosyncratic risk and a lower credit risk, with no impact on returns on convertible bonds. The volatility of stock returns is positively related to returns on convertible bonds, and it is found that diversified strategies and returns on a company's equity help to improve its credit rating and that a better credit rating triggers an increase in returns on convertible bonds and idiosyncratic risk, indicating that evaluations of the value of convertible bonds must take pure bonds and equity (option) values into account. After excluding conversion values and estimating the idiosyncratic risk on daily, weekly, and monthly bases, this study suggests that there is a positive relation between returns on convertible bonds and information transparency when estimating idiosyncratic risk on a monthly basis and that a positive association also exists between credit rating, idiosyncratic risk, and returns on bonds.     

Transparency,Value Creation,and Financial Crises

This article reports the findings of the authors' recent study of the impact of the level of corporate transparency on shareholder value creation during periods of financial crisis. Their sample consists of the companies comprising Spain's IBEX 35 stock index during the ten‐year period 2000–2010. The study uses three different measures of earnings management (EM) as inverse indicators of the quality of disclosure and carries out fixed effects regressions that adjust for firm and industry characteristics, two periods of financial crises, and the passage of time. The main findings of the study are that (1) companies with lower disclosure quality have generated less value for their shareholders over long time periods and that (2) the shareholders of companies that were more aggressive in managing their earnings experienced greater wealth destruction during the two financial crises of the last decade. Given the still unfolding impact of the recent global financial crisis, as reflected in the current debt crisis in Western European countries, the authors' study reinforces the importance of the current debate over the benefits and costs of increasing the regulation of financial markets, especially in the areas of transparency and disclosure requirements.     

Risk Aversion, Transparency, and Market Performance

Using a model of market making with inventories based on Biais (1993), we find that investors obtain more favorable execution prices, and they hence invest more, when markets are fragmented. In our model, risk-averse dealers use less aggressive price strategies in more transparent markets (centralized) because quote dissemination alleviates uncertainty about the prices quoted by other dealers and, hence, reduces the need to compete aggressively for order flow. Further, we show that the move toward greater transparency (centralization) may have detrimental effects on liquidity and welfare.     

Auditor Fees, Market Microstructure, and Firm Transparency

Abstract:  Auditors, as corporate insiders, have access to private information regarding the firm's financial and business opacity that is unavailable to outside investors. We test whether auditors price their knowledge of firm opacity in their audit fees by examining two competing hypotheses. The first states that higher audit fees may reflect the greater risk that the auditor faces in auditing an opaque firm. Under this hypothesis, market based measures of opacity will be positively correlated with higher fees. The second hypothesis states that firms buy reputational capital from their auditor by paying high fees in an attempt to improve the market's perception of the firm's transparency. In this case, higher audit fees are negatively correlated with market based measures of opacity. Our results are consistent with the first hypothesis, that auditors price opacity risk into their fees.     

Dark trends: Psychology,science fiction,and the ominous consensus

Many science fiction authors predict that the world will continue moving towards an environment characterised by a combination of high population density and advanced technology. Psychologists and writers of fiction both appear to be in general agreement that such an environment will result in an information overload, intolerable time pressures, overwork for a minority with a lack of meaningful work for the majority, and the loss of privacy and autonomy. Futurists should note the agreement between artistic vision and scientific research—that human civilisation appears to be moving towards conditions that are unpleasant and deleterious.     

Fiscal Transparency,Fiscal Performance and Credit Ratings

Fiscal transparency can provide policymakers with incentives to adopt better policies by enhancing the public debate on the design and sustainability of fiscal policy and establishing accountability for their implementation. Fiscal transparency can also reduce uncertainty about fiscal policy and fiscal outturns by providing more information on the underlying fiscal position and fiscal risks. Both effects suggest that countries should benefit from adopting transparency enhancing policies through better market assessments of their sovereign risk. In this paper, we investigate whether fiscal transparency has an effect on market perceptions of sovereign risk, as measured by sovereign credit ratings, and if so, through which channels. We find that fiscal transparency has a positive and significant effect on ratings – one standard deviation increase in fiscal transparency increases credit ratings by 0.7 and 1 notches (or steps in the credit rating scale) in advanced and developing economies, respectively – but its effect works through different channels in advanced and developing economies. In advanced economies, fiscal transparency is associated with better fiscal outcomes, leading indirectly to higher credit ratings. In developing economies, the direct uncertainty‐reducing effect of fiscal transparency seems to be more important. Indeed, the effect of fiscal transparency on fiscal performance is found to increase with the level of institutional development.