Relationship between Transparency, Liquidity and Valuation

Authors: Zahra Lashgari, Naghmeh Sadat MaghamiTekiyeh

Abstract:

Recent evidences on liquidity and valuation of securities in the capital markets clearly show the importance of stock market liquidity and valuation of firms. In this paper, relationship between transparency, liquidity, and valuation is studied by using data obtained from 70 companies listed in Tehran Stock Exchange during2003-2012. In this study, discriminatory earnings management, as a sign of lack of transparency and Tobin's Q, was used as the criteria of valuation. The results indicate that there is a significant and reversed relationship between earnings management and liquidity. On the other hand, there is a relationship between liquidity and transparency.The results also indicate a significant relationship between transparency and valuation. Transparency has an indirect effect on firm valuation alone or through the liquidity channel. Although the effect of transparency on the value of a firm was reduced by adding the variable of liquidity, the cumulative effect of transparency and liquidity increased.

Keywords: Firm valuation, Earnings management, Liquidity, Tobin's Q, Transparency.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1072070

References:

[1] Barth,M.,Landsman,W.,Lang,M.,20008.International Accounting Standards and Accounting Qualities. Journal of Accounting research 46,467-496
[2] Bekaert, G., C. R. Harvey, and C. Lundblad. "Liquidity and Expected Returns: Lessons from Emerging Markets." Review of Financial Studies 20.6 (2007): 1783-831
[3] Bigdeli Eslami, Gh, and A. Saranj. "Selection of Portfolio Using Three Measures of Average Returns, Standard Deviation of Returns and Liquidity in Tehran Stock Exchange." Accounting and Auditing Studies 53.15 (2008): 3-16.
[4] Daske, Holger. "Economic Benefits of Adopting IFRS or US-GAAP - Have the Expected Cost of Equity Capital Really Decreased?" Journal of Business Finance and Accounting 0.0 (2006): 329-73.
[5] Daske, Holger, Luzi Hail, Christian Leuz, and Rodrigo Verdi. "Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences." Journal of Accounting Research 46 (2008): 1085-142.
[6] Francis,J.,LaFond,R.,Olsson,P.,Schipper,K. 2004.Cost of Equity and Earning Attributes. The Accounting Review 79, 967-1010.
[7] Gass, David. "Importance Of Transparency In Financial Reporting." (n.d.): n. pag. 04 Dec. 2006. .
[8] Glosten, Lawrence R., and Paul Milgrom. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders." Journal of Financial Economics 14.1 (1985): 71-100.
[9] Hail, Luzi, and Christian Leuz. "International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?" Journal of Accounting Research 44.3 (2006): 485-531.
[10] Hail, Luzi, and Christian Leuz. "Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-listings." Journal of Financial Economics 93.3 (2009): 428-54.
[11] Lang,M.,Smith, Raedy,J.,Wilsom,W.,2006,Earning Management and Cross Listing: Are Reconciles Earnings Comparable to U.S. Earnings? Journal of Accounting and Economics 42, 255-283.
[12] Lang, Mark H., Karl V. Lins, and Mark Maffett. "Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most." Journal of Accounting Research (JAR) (2011): n. page.
[13] Leuz, Christian. "IAS versus U.S. GAAP: Information Asymmetry- Based Evidence from Germany's New Market." Journal of Accounting Research 41.3 (2003): 445-72.
[14] Leuz,C.,Nanda,D.,Wysocki,P.,2003.Earning Management and Investor Protection: An International Comparison. Journal of Financial Economics 69-505-527.
[15] Nikolaev, Valeri, and Laurence Van Lent. "The Endogeneity Bias in the Relation between Cost-of-debt Capital and Corporate Disclosure Policy." European Accounting Review 14.4 (2005): 677-724.
[16] Roulstone, Darren T. "Analyst Following and Market Liquidity." Contemporary Accounting Research 20.3 (2003): 552-78.
[17] Yahyazadefar, M., and J. Khorramdin. "The Role of Liquidity and Lack of Liquidity Risk on Excess Stock Returns in Tehran Stock Exchange." Journal of Accounting and Auditing Reviews 53 (n.d.): n. page.