Transparency Regulation and Stock Price Informativeness: Evidence from the European Union's Transparency Directive

Abstract

We examine changes in stock price informativeness following the European Union's Transparency Directive (TPD). The TPD, implemented by country between 2007 and 2009, enhanced corporate transparency through mandating regular firm financial disclosures and facilitating the dissemination of financial reports. Using stock return synchronicity as a proxy for stock price informativeness, we find that price informativeness improved following implementation of the TPD. This improvement was more pronounced in countries with strong regulatory environments than those with weak regulatory environments. We additionally examine a later amendment to the TPD that eliminated the requirement of quarterly financial disclosures and document an increase in stock return synchronicity following the amendment. Our findings support prior research suggesting that transparency regulations improve financial information. JEL Classifications: F30; G15; G30; M4. Data Availability: Data are available from the sources cited in the text.

The impact of securities regulation on the information environment around stock-financed acquisitions

“…However, and consistent with Christensen et al (2016), Fauver et al (2017 also document that the impact of the new regulations depends significantly on the prior quality of institutions and regulatory regimes. This evidence is corroborated by Watanabe et al (2019), who show that stock price informativeness improved post-TPD; however, such improvement was more pronounced in countries with prior strong regulatory environments.…”

“…Most of the previous research focuses on the impact of U.S. regulatory changes (Leuz and Wysocki, 2016), whereas Christensen et al (2016), Fauver et al (2017, and Watanabe et al (2019) provide evidence about the effects of EU regulation on information environment, which contributes to a broader debate about the benefits of regulation and its differential effects across countries. Christensen et al (2016) find that market liquidity increases post enactment of MAD and PD, after controlling for the adoption of other EU Directives.…”

“…Prior research has debated whether securities regulation do actually improve the functioning of capital markets. Some studies stand in favor of securities regulation that targets disclosure requirements and transparency, by advocating the beneficial outcomes of those rules, such as market-wide cost savings, discouraging undesirable behavior in capital markets, and a vast array of positive externalities (e.g., Coffee, 1984Coffee, , 2007Zingales, 2009;Christensen, Hail, and Leuz, 2016;Leuz and Wysocki, 2016;Fauver, Loureiro, and Taboada, 2017;Watanabe, Imhof, and Tartaroglu, 2019).…”

“…First, we contribute to the literature on the effects of securities regulation for capital markets. Leuz and Wysocki (2016) argue that the evidence on the causal effects of disclosure and reporting regulation is still scarce (e.g., Christensen et al, (2016), Fauver et al (2017), and Watanabe et al (2019) are some of the few studies about EU regulation).…”

“…Finally, we add to the literature on the efficacy of securities regulation enforcement in the EU (Christensen et al, 2016;Fauver et al, 2017;Watanabe et al, 2019), and the expected harmonization and integration of EU financial markets, which is the main goal of the EU's FSAP of 1999. Achieving full integration is, however, an ambitious goal, which requires a harmonization process that is comprehensive in scope, mandatory in nature, and maximal in integration, leaving little room for countries' discretion (Enriques and Gatti, 2008).…”