Additional evidence on transparency and bank financial performance

• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1016/j.rfe.2016.09.001

Additional evidence on transparency and bank financial performance

Aigbe Akhigbe

a

, James E. McNulty

b,

⁎

,1

, Bradley A. Stevenson

c

a

Departmentof Finance, The College of Business,The University of Akron,302 Buchtel Mall, Akron, OH 44325-4803,United States

b

Departmentof Finance, College of Business,Florida AtlanticUniversity, 777 Glades Road,Boca Raton, FL 33431-0991, UnitedStates

c

W. FieldingRubel College of Business,Bellarmine University,2001 Newburg Road,Louisville, KY 40205,United States

abstractarticle info

Articlehistory:

Received18 March 2015

Receivedin revised form 14 September2016

Accepted14 September 2016

Availableonline 19 September2016

JEL classification:

G21

D02

Transparencyexpands the market for a firm's stock and lowers the cost of capital.Previous research measures

bank transparencyby analyst following and the standard deviationof analyst earnings per share forecasts and

finds that transparency has a positiveeffect on bank financial performance. An earlier theoretical study in the

market microstructure literature suggests thatreturn volatility and trading volumeare important measures of

transparency.We examinethe relation betweentransparency andbank holding company (BHC)profitefficiency

usingthese four measuresof transparency for 1996through 2014. Our two stageleast squares regressionanalysis

indicatesthat transparency has a positiveeffect on bank financial performance.This is not a size effect as there-

sult holds in eachof three size categories.This is an important finding giventhat the recent financial crisis was

characterizedby a lack of transparencyat a number of banking institutions.

© 2016 Publishedby Elsevier Inc.

Keywords:

Profitefficiency

Transparency

Stochasticfrontier analysis

1. Introduction

Transparency shouldimprove bank financial performance by mak-

ing it more likely that large investors will purchase the bank's stock,

thus providing greater liquidity for thestock and lowering the cost of

capital. Additionally, more transparent firms would be expected to be

better managed with a more reliable flow of information both within

the firm and to investors. Akhigbe , McNulty, and Stevenson (2013)

measure bank transparency by the number of analysts following the

bank's stock and the standard deviation of analyst earnings per share

(EPS) forecasts; a larger number of analysts and a lower dispersionof

analyst forecasts suggest greater tra nsparency. They find a positive

association betweentheir measures of transparency and bankholding

company (BHC)financial performance.

Madhavan's(1995) highlycited paper uses a theoreticalmodel with

two other measures of transpare ncy —return volatility and tradi ng

volume.

2

Less uncertainty about the firm's condit ion and prospects

should lead to less volatility in the stock price and in stock retur ns,

which suggests greater transp arency. Higher trading volume a lso

suggests greater transparenc y —more analysts cover the stock, and

more information about the compan y would be available from

brokerage firms and other sources . We incorporate Madhaven's

measures intobank performance analysis.

We follow AMS (2013) by hypothesizing t hat transparency is

positively associated with pr ofitefficiency. We consider all four

transparency measures. Howeve r, while transparency can affec t

performance,performance can also affect transparency. Hence, weuse

a simultaneousequations frameworkto test the hypothesis. Ourresults

are consistentwith our hypothesis, but only two of the fourmeasures,

return volatilityand forecast error, are statisticallysignificant with the

expectedsign when all four measuresare considered together.Howev-

er,while the number of analystsis not significantin the period up to and

including 2014, the presenceof analyst coverage does increases profit

efficiency in the 1996 to 2006 period st udied by AMS (2013).Thus,

the importance of analyst cover age appears to be diminished in the

2007 to 2014 period. These results using the two additionalmeasures

of transparency and the much larger sample are generally consistent

with AMS's (2013) ordinary leastsquares results.

Madhavan's(1995) study is in thecontext of market microstructure

rather than bank performance. In addition, he uses price vola tility in the

market, rather than return volatility, as an indicator of transparency. Of

course, price volatility and return volatilityare related since less price

volatility allows investors to trade a stock with more certainty about

Reviewof Financial Economics32 (2017) 1–6

⁎Correspondingauthor.

E-mailaddresses: aigbe@uakron.edu(A. Akhigbe), jemcnult@bellsouth.net

(J.E.McNulty), bstevenson@bellarmine.edu (B.A. Stevenson).

1

ProfessorMcNulty thanks the Collegeof Business at Florida AtlanticUniversity for fi-

nancialsupport for this research.

2

Madhavan (1995) is cited 325 times as of early March 2016, according to

Google.scholar.com.

http://dx.doi.org/10.1016/j.rfe.2016.09.001

1058-3300/©2016 Published by ElsevierInc.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe