Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most
Mark H. Lang
University of North Carolina at Chapel Hill
Karl V. Lins
University of Utah - Department of Finance
Mark G. Maffett
University of Chicago - Booth School of Business
December 15, 2011
Journal of Accounting Research (JAR), Forthcoming
We examine the relation between firm-level transparency, stock market liquidity, and valuation across a variety of international settings. 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.
Number of Pages in PDF File: 69
Keywords: transparency, liquidity, valuation, cost of capital
JEL Classification: G15, G24, G32, M41, M43, M44, K22
Date posted: January 8, 2009 ; Last revised: September 19, 2012
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