firms, although the magnitude of the impact is
debatable. The S&P study on transparency and
disclosure referenced earlier also finds evidence,
albeit weak, that companies with moretransparent
financial statements have lower costs of capital.- Stocks in markets with poorer disclosure tend to
movetogetherfarmore,thusreducingtheadvantages
ofdiversificationandincreasingexposuretomarket
risk (and the risks of market crashes) across the
board.
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We would hasten to add that much of the evidence is
ambiguousanditisdifficulttoprovethatbetterdisclosure,by
itself,isthecauseforthelowercostofcapital.Afterall,firms
thatdisclosemoreinformationhaveothercharacteristicssuch
as better corporate governance and operating performance
that may also explain the lower costs of capital.
Market Reaction to Changing Disclosure Policy
The most direct test of whether markets value more
informationdisclosureistolookathowtheyreacttochanges
indisclosurepractice.Thesechangescaneitherbeforcedby
regulatoryshifts(fromlessdisclosuretomoredisclosure)or
bevoluntary,whereafirmchoosestoincreasetheamountof
information it makes available to markets.
- Emerging markets that change their accounting
standards to increase transparency usually report
strong positive reactions to these changes, with