Does securities regulation improve transparency? : an examination of the effects of EU's transparency directive on stock price informativeness, crash risk, and financial reporting quality
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[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] This paper examines the impact of a transparency regulation on stock price informativeness, stock crash risk, and financial reporting quality. Specifically, it focuses on the Transparency Directive (TPD), a key securities regulation implemented by the EU countries in recent years, which strives to increase and improve the flow of firm-specific information by mandating broader disclosure requirements, including greater reporting frequency by public companies listed in the EU member countries. Using a sample firms from 25 EU countries during the 2001-2010 time period, I find robust evidence that stock price informativeness improved, crash risk declined, asymmetric timeliness of loss recognition increased, and good news timeliness declined, following the implementation of TPD. I find inconclusive evidence on the impact of TPD on accrual quality. I also find mixed evidence on the role of regulation, implementation and enforcement of TPD in explaining the relation of TPD with stock return synchronicity, crash risk, and financial reporting quality. Specifically, I find the increase in asymmetric timeliness of loss recognition and a decline in good news timeliness are driven by countries with strong TPD implementation and enforcement efforts. However, I do not find that a decline in synchronicity and crash risk is affected by the level of regulation or TPD enforcement. Overall, my study provides evidence that mandatory securities regulation aids in improving transparency.
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