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

Transparency, liquidity, and valuation:

International evidence on when transparency matters most

Megan Gormley

FIN 630 Section 2152

University of Maryland University College

Introduction

In the peer reviewed article “Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most” by authors Lang, Lins, and Maffett, the effects of different levels of firm transparency on various types of business outcomes are discussed. Transparency is a recognized societal and ethical issue that specifically relates to the concept of financial transparency with factors such as liquidity and valuation. “Liquidity is a significant channel through which transparency affects firm valuation and equity costs of capital” (Lang et. al, 2012).

Summary

The authors emphasize their point of transparency being beneficial to an organization by establishing a relationship between firm transparency and various beneficial factors, in regards to its effects on employees, creditors, and shareholders (Lang et. al, 2012). A net benefit of increased profits derived from lower transaction costs is provided to all stakeholders for organizations that exemplify greater transparency. A rise in an organizations staffing to maintain separation of duties and ethical implications is an added benefit to employees and creditors. Lang, Lins, and Maffett (2012) note “The relation between transparency and liquidity is more pronounced in periods of high volatility…and when ownership is more concentrated, suggesting firm-level transparency matter more…” By associating transparency with outcomes relationships such as: higher firm valuation, greater liquidity, and a decrease in cost of capital have been developed which are all beneficial to stakeholders and shareholders.

Analysis

The relationship between transparency, liquidity, and valuation of different companies included a sample of “97,799 firm-year observations across...