Euro-Asian Journal of Economics and Finance ISSN: 2310-0184 (print) ISSN: 2310-4929 (online) Volume: 2, Issue: 1 (January 2014), Pages: 66-71 © Academy of Business & Scientific Research

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Information Transparency and its Role in Capital Market Zahra Mousavi1*, and Seyyed Reza Mousavinia2 1. 2.

Department of Accounting ,Andimeshk Branch , Islamic Azad University , Andimeshk , Iran. Department of English language , Andimeshk Branch , Islamic Azad University , Andimeshk , Iran.

One of the competitive conditions in the stock market is the market transparency i.e. the availability of sufficient information and its accessibility with low-cost and for the public. When there is sufficient information in the market and is easily accessible to both buyers and sellers, both groups will decide correctly and easily. Purpose of this paper is to examine transparency and its different aspects in the capital market. For that reason, the definitions of the various investigators are presented in terms of transparency; after that, the procedure to measure the transparency and its identification components are listed. Afterwards, the relationship between transparency and disclosure of information and the performance of stock market with the information transparency have been investigated. After this section, the efficiency situations of the capital market and its fully transparent analysis have been analyzed. Finally, the conclusion is also presented.

Keywords: disclosure, transparency, capital market, information, efficiency of capital market

INTRODUCTION When capital markets culminated in the early 2000, bankruptcies and scandals in some companies gradually weakened the investor confidence over the responsibility for data reporting and the issue of public confidence in the quality of the data reported was declared. Because of the loss of public confidence, the need for more and better information increased and lead to a more emphatic demand to have more transparency of companies' information (Di Piazza and Icarus, 2001). Transparency Definition Transparency can be defined as simplicity and ease of meaningful analysis of the company's activities and economic associations by an outsider to the company. Transparency is the management capacity indicator to provide the

necessary information in the proper, clear, timely and available form, especially the audited information that have been published as the public report and through their reflection in the media and other methods. In other words, transparency reflects this fact that whether investors have a true picture of what really going on inside the company or not? Transparency of information means that information about a company whose shares are traded in the market and where investors can invest should be equally available to everyone with minimum cost and in the shortest possible time. Several definition of transparency is offered. Bushman and Smith (2003) have defined the transparency of the company as: "the availability of relevant and reliable information about the

*Corresponding author: Zahra Mousavi, Department of Accounting ,Andimeshk Branch , Islamic Azad University , Andimeshk , Iran. E-Mail [email protected]

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Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 2, Issue: 1, Pages: 66-71

performance, financial condition, investment opportunities, governance procedure, and the business risk of a firm". In Webster's dictionary (1972) transparency is defined as: "institutions openness or being open (easy access to the company's inside operations), the open nature of institutions (obviousness), honesty and capability of easy understanding." In this definition, institutions openness or being open means easy access to the company's inside operations, and the open nature of institutions means obviousness and clarity of information. These three above variables are closely related to each other and they cannot be considered in isolation from each other. Other various definitions have also been provided which, depending on what concepts they are built, can be distinguished as the three classifications as follows: A) Definitions based on the information stakeholder: Vishwanath and Kaufmann (1999) and Kaufmann (2002) have defined transparency as: "increased flow of timely and reliable economic, social and political information which is available to all relevant stakeholders". Also Vishwanath and Kaufmann (1999) have defined the lack of transparency as: "intentional blocking of access to information, misrepresentation of information or failure to gain market confidence in the adequacy and quality of the information provided". The viewpoint of the Organization for Economic Cooperation and Development (2002) may be wider and the transparency is explained as: "mutual relationship between the company and other stakeholder groups". B) Definitions based on the accountability: The Transparency Specialized Group Center in the Brookings University has stated the transparency as "the degree of the institutions openness and being open, that is monitoring and evaluation of the company (including directors) by people outside the company (i.e. shareholders)." In the definition of Florini (1999) from the transparency as the accountability has become more prominent. He defined transparency as "the disclosure of information by companies that are relevant to its assessment". In his view, transparency is a tool for facilitating the assessment of corporate

performance. Emphasize the right of access to the information (with regard to the privacy of both producer and consumer) and the possibility of evaluating the corporate performance using this information has become more prominent in the mentioned definitions. In fact, transparency is much closely related to the accountability and the reason to demand for transparency is that the market knows the companies responsible for the adopted policies and their functions (Bloor and Kaufmann 2005). C) Definitions of transparency with an emphasis on rules and regulations: WTO recognizes the ensured access to transparency in international trade agreements involved in three core prerequisites: (1) information about the rules, regulations and procedures publicly published, (2) to notify the laws and regulations to the interest groups and their changes, and (3) ensuring that laws and regulations be executed consistently, impartially and reasonably. (Tajvidi) Transparency measures Criteria for measuring the transparency of financial information in Standards and Poor's are divided into the following five categories: 1.

Transparency in the ownership structure

2.

Investor relations

3.

Financial transparency

4.

Disclosure of information and

5.

Directors' board structure.

According to the criteria, transparency is the investor confidence in financial statements of companies in the capital market. Ownership structure and investor relations are to identify the ownership structure and shareholders at the time of making an investment in a company or macrolevel decision-makings for a company, especially the major identification. Disclosure of financial information means the availability of the financial information about the activities of the company timely. The transparency of the directors' board is the sum of the total transparency standards in the directors' board structure of a company which will be measured based on integrity of majority of the

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Information Transparency and its Role in Capital Market

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members of the board, their experience and expertise (Chiang, 2005).

6. External environment of the company, competitive position and strategies.

Furthermore, Vishwanath and Kaufmann (2001) declared three criteria for transparency of information:

7. Financial goals of the company, the achievement rate and the futuristic statements.

1.

Access to or the availability of information

2.

Relevance

3.

Quality and reliability.

Accessibility concerns on the communications media of the companies to provide financial information. The limitation which is in measuring this criterion is the lack of the users' education or knowledge about how to use the information and data analysis. As per the second criterion, it is difficult to define and select the appropriate information. The third criterion of the research is the quality and reliability; the quality and reliability of the financial information refer to this issue that the published financial information should be effective, clear and simple. This information should also be consistent with accepted principles of accounting. Components of transparency Transparent systems require accurate and reliable information that are given timely and easily, either directly or through accredited and famous representatives such as accountants, auditors, rating agencies, stock analysts, financial journalists and media to all of the shareholders (Hallwood, 2001). Generally, transparency components can be placed in the following nine groups: 1. Company's financial results and operational achievements. 2. Major shareholders, voting rights, shareholders assembly information. 3. Key directors' board and executives, structures and practices and remuneration of these people. 4. Important disclosures relating to employees and other stakeholders. 5.

Legal structure and ownership.

8. Real drivers of value and risk predictable factors, and how to manage them by the company. 9. Details of non-executive directors and their interests (Hallwood, 2001). Transparency types In general, it can be stated that the capital market transparency is defined as the market conditions and trading information, based on a specific time and this transparency is often divided into two categories: 1) Pre-trade transparency which is referred to the announcement and publication of prices, and other related operators and index. 2) Post-trade transparency which deals with the data relating to disclosure of information and data of the completed transactions. As a result, the markets that revealed small amounts of data are considered non-transparent (Abbasi). Institutions affecting transparency Some of the main institutions that provide information transparency conditions prevailing capital market are as follows: • Financial and information intermediaries such as banks, rating and validation agencies, financial analysts and the press. •

Auditing firms.

•

Rules and regulations of the stock.

• Disclosure regime (Hassas Yeganeh and Nadi Qummi). Disclosure of information and transparency Market transparency is considered as the fundamental mechanism for reducing information asymmetry between participants in the capital markets (Blake and Lu, 2006). Main objective of the information disclosure is to create

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Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 2, Issue: 1, Pages: 66-71

transparency in the stock; the correctly and timely publication of the market information causes a positive impression towards the justice and stability in the market and it becomes more cohesive. Levels of transparency in any company depend on its disclosure of information. So we can conclude that the disclosure of information and transparency, both protect shareholders' rights. There are two general groups of company characteristics that can affect a company's level of disclosure and transparency. The first group includes the financial characteristics of the company, while the second group is related to corporate governance characteristics (Chang et al, 2009). Conducted studies show that greater disclosure and transparency will attract several benefits to companies: long-term investment by investors, improving access to new capital, low cost of capital, more reliable and responsible management, and ultimately, higher stock prices and shareholder interests. When stock prices are based on value creation, not on the management's expectations of the profits or reported earnings, the market size, its liquidity are consistently rising, and not only for shareholders but also for society in general, more wealth is created. (Hallwood, 2001) Information transparency and efficiency of the stock market Sufficient information in the market and rapid and timely reflecting the information on the stock prices is closely related to the market efficiency. In an efficient market, information that is released in the market quickly affects the price. In such a market, stock prices are closer to its intrinsic value; in other words, the important feature of the efficient market is that the market-determined prices are a good indicator of the true value of the stock. Hence, efficient market is defined as the market where stock prices such as common stock prices reflect all available information in the market. Efficient market should be sensitive to new information. If new information is announced to the public, the company's common stock price will change in accordance with the above data. In case a market is indifferent toward new information and does not reflect the necessary response, i.e.

there is no analyzer in the market to evaluate and assess the effectiveness of new information on the market price, that market is not naturally efficient (Jahankhani and Abdoh Tabrizi). The existence of transparency in the stock market has several features of which the most important one is the information transparency; that is as per the stock market, the more the information transparency in the market, the closer the market price would be to its intrinsic or actual value, and hence the price will be fair. As a consequence, the direct effects of information transparency of the market would be on the price. This shall increase the degree of confidence in the fairness of the market price; of course, in order for the stock price to be close to its intrinsic value, in additions to the information transparency, it is necessary to have a number of financial and economic experts in the market to study and evaluate the reports and information released and based on the new information, they continue to review the stock value. In other words, the more the experts are in the market, the faster the information are reflected in the market and the closer the market price will be to its intrinsic value. Jackson developed the theory of efficient capital markets and divided this theory into two different groups of people: the first group includes capital market experts. This group can often have the benefit which will be provided by the full financial information based on their educational background. The second group consists of the market model or the average investment. This group often has less knowledge about financial information or no time to read or understand the published financial data. This group benefits from the opinions of the technical market analysts (Jackson, 2003). In general, the proper functioning of the capital market can increase efficiency, investment and growth (Chiang, 2005) and it can also increase the economic growth through storing the monetary assets and increasing the growth rate of physical capital, at least in the long run (Valeria and Smith, 1991); for that reason, the higher the information transparency is (which is an important factor in market efficiency), the better this role will be played (Sinai and Davoodi, 2009).

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Information Transparency and its Role in Capital Market Many theoretical analysts predict that the markets with low transparency may increase liquidity. Specifically, Bloomfield and O'Hara stated that a non-transparent market may provide incentives for the market makers that the differences between proposed prices and demanded prices are reduce as much as possible. Since the order flow which rises during the closing of the offered prices by demanded prices, includes valuable information about the structure and the market basics. However, these researchers in 2000 presented the empirical evidence which totally was a reason for the above-mentioned claim. THE EFFICIENCY SITUATION OF CAPITAL MARKET IN IRAN A quick look at the three separable decades in the activities of Tehran Stock Exchange which is considered as one of the main pillars of the capital market indicate that the efficiency in the stock performance allocated the lowest place. The review of the discussions on capital market efficiency is related to the renaissance period of Tehran Stock Exchange which was simultaneous with the beginning of the first phase of the fiveyear economic, social and political development plan. All of the conducted studies on the efficiency situation of the capital markets warn us about the lack of the low efficiency in Tehran Stock Exchange. In other words, Tehran Stock Exchange lacks even the weak levels of efficiency which is the minimum efficiency rate defined in the capital market. The most important consequence of this situation is the lack of financial resources optimal allocation to the profit-making economic sectors for the growth and development of the country. Non-optimal allocation of financial resources resulted in the financial resources squander that will have disastrous results for the economy (Pourebrahim, Mohammad Reza. 2003). Analysis of capital market transparency in Iran What caused the formation and changing of investors' expectations in capital market is the data that are relevant to the market in some way. Such information may include any information which is published from various sources and

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somehow changes the capital market. Every investor, on the basis of the expectations made of the type of information, determines his own expected rate of yields and, on this basis, offers his proposed price for trading. It is evident that the data fluctuation and more importantly, their nontransparency, leads to the lack of proper formation of expectations, and finally, the formation of a false and unrealistic prices in the market. Capital market investors based on the expected yields (expectations) and their own risk-taking, have entered into a transaction in which both buyer and seller before the transaction expect profits. Certainly, in such a market, the type of the information which caused the formation of these expectations is of high importance, and generally, their heterogeneous information will cause rapid transactions. In such conditions, transactions are formed in such a way that after the transaction, pre-trade expectations (that happens before the deal) will be much different with the post-trade realities (that happens after the deal). Because the same heterogeneity of the data causes the transaction process to be non-transparent and in other words, will create an informational rent. Such a market will serve only the interests of investors in an unequal equation of information related to specific information sources and based on this information, they will enter a win-lose play. Such a market will operate exclusively and solely for certain group who not only cause a spur economic development, but also it will result in non-equitable distribution of wealth and its accumulation in the hands of a certain group. In this kind of market, industry and market will serve the informational rentier group and not only the capital markets philosophy will not be realized, but also will lead to the profound negative shocks incurred to the economy. (Abbasi) CONCLUSIONS Capital market as a part of financial markets plays an important role in the economy. Moreover, financial markets provide a prospective outlook of economic companies. In this market, information is a valuable and main source which plays a more important role in integrating and competitiveness of the market so that the information should make available to everyone on price, trading volume,

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Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 2, Issue: 1, Pages: 66-71

and … Financial transparency and full and fair information disclosure for the optimal functioning of an efficient capital market is considered a critical factor. Improvement and enhancement of the information disclosure improves the transparency. In fact, creating the transparency of information in organizations and markets is a very important element to decide and control the correct flow of data. Finally, in order to improve and enhance the market transparency, we should pay attention to the available regulations in this field and focus to monitor fully on their execution.

7. Abbasi, Abbas. Systematic analysis of the techniques and barriers to increasing transparency in the Iranian capital market. 8. Stock Exchange functions and its position in the financial markets; report of a study, Tehran Stock Exchange. Management Economic Reviews and Studies, 1997. 9. Nobakht, Zahra. (2004). Evaluation of information transparency of the companies listed in Tehran Stock Exchange. MS Thesis, University of Alzahra.

REFERENCES 1. Improving safety regulation and transparency of the capital market in Iran: Trade final data holders, Report 1 of the Study. Tehran Stock Exchange Organization, Management Economic Reviews and Studies, July 2002. 2. Pourebrahimi. MR. Evaluation of the efficiency of capital markets. Bourse 39. January 2003, pp. 48-44. 3. Tajvidi, Elnaz. Obligation to information disclosure to the capital market transparency. Investment Market Daily Newspaper 4. Jahankhani, Ali, Abdoh Tabrizi, H. Theory of efficient capital markets. 5. Khalife, M. (2007). Evaluation of methods for increasing information transparency in the Iranian capital market and selection of the optimum method using analytic hierarchy process. MS Thesis, Shahid Bahonar University of Kerman. 6. Sinai, Hassanali, and Davoodi Abdullah. Review the Clarification of the relationship between financial information transparency and investors' behavior in Tehran Stock Exchange. Quarterly Journal of Financial Research, Volume 11, Number 27, Spring and Summer 2009.

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