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

Journal of Accounting Research 50, No. 3 (2012): 729-774

69 Pages Posted: 8 Jan 2009 Last revised: 25 Aug 2016

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

Date Written: December 15, 2011

Abstract

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.

Keywords: transparency, liquidity, valuation, cost of capital

JEL Classification: G15, G24, G32, M41, M43, M44, K22

Suggested Citation

Lang, Mark H. and Lins, Karl V. and Maffett, Mark G., Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most (December 15, 2011). Journal of Accounting Research 50, No. 3 (2012): 729-774. Available at SSRN: https://ssrn.com/abstract=1323514

Mark H. Lang (Contact Author)

University of North Carolina at Chapel Hill ( email )

Kenan-Flagler Business School
McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-1644 (Phone)
919-962-4727 (Fax)

Karl V. Lins

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)
801-581-7214 (Fax)

Mark G. Maffett

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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