Reductions in the liquidity and valuation of securities traded in global capital markets during the recent financial crisis have demonstrated the importance of understanding more fully the drivers of a firm’s stock market liquidity and associated linkages to valuation. In the paper, Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most, forthcoming in the Journal of Accounting Research,” we examine whether reduced transparency is associated with increased transaction costs and lower liquidity in a firm’s shares and, therefore, increased cost of capital and reduced valuation. We also investigate the extent to which the relation between transparency and liquidity is influenced by institutional and firm-level factors and by time series variation in uncertainty.

Our sample includes 97,799 firm-year observations across 46 countries over the period 1994–2007. In our first set of tests, we relate transparency to transaction costs and stock market liquidity. To measure transparency, we employ several firm-choice variables from prior cross-country research including earnings management (Fan and Wong (2002) and Leuz, Nanda, and Wysocki (2003)), auditor quality (Fan and Wong (2005)), and adoption of global accounting standards (Daske, Hail, Leuz and Verdi (2008, 2009)). We also employ two transparency variables that capture external information gathering by intermediaries: the number of analysts who cover a firm and the accuracy of analyst forecasts.

(more…)