Corporate Transparency And Stock Liquidity Risk

In this paper, we studied the relationship between corporate transparency andstock liquidity risk. Although there are many papers about corporate transparency andabout stock liquidity, research on the relationship between corporate transparency andstock liquidity risk lacks in China. Liquidity is the most important basic factor offinancial market. Liquidity of financial market depends on the liquidity of each stock,in addition the stock liquidity influences the value of firm and also investors’expectation. Some stocks have a higher level of liquidity, but they also possess higherrisk. Investors care more about timing of stocks’ variability than the level of liquidity.During market downturns, speculators’ capital tends to drop, and funding tends to dryup. At this time, the risk of stock liquidity implies the sensibility of stock liquidity.The stocks with low liquidity risk are not easy to be affected by the fluctuation ofmarket, and can trade easily during market downturns.In this paper, based on data from RESSET over the2004-2010time periods, wedocumented that firms with greater transparency experience less liquidity volatility,fewer extreme illiquidity events for a sample of407A-share publicly listed companieson the Shenzhen Stock Exchange. The time span of our sample contains a period ofmarket downturn. And during crises, the transparent firms can maintain a higherliquidity.Finally, we give some suggestions. We believe that departments should developpolicies to insure firms to provide more information so that financial market moveshealthily. On the other side, firms should provide more information to improvecorporate transparency, and high transparency can help them increase their liquidityand also the ability to resist outside influence.