Transparency in Financial Markets: Are the Effects Visible?

Abstract

This thesis includes three papers providing empirical evidence of the impacts of transparency on financial markets. The findings unfold the short and long-term effects of transparency announcements on the stock market, as well as the operational dynamics of large bank deposits when the market is (atypically) informationally transparent.

The first and second paper utilize a transparency practice by the world’s largest stock owner, Norway’s sovereign wealth fund. This fund is transparent about its ESG (Environmental, Social, and Governance) expectations of its portfolio constituents, and one of its practices is to regulate a set of ethical guidelines. When the fund has identified breaches by firms, it makes public punitive announcements stating the ESG-reasoning and the firms' consequences: exclusion or placement on a watch-list. The main contribution of the first paper lies in the disentanglement of the immediate negative price effects, demonstrated by the separation between the different announcement rationales. Meanwhile, the second paper studies the long-term effects and extends the investigation to peer firms and those in the supply chain of the announced firms. The findings confirm long-term effects on specific firm types and suggest a positive relation between firms’ ESG quality and financial performance.

The third paper investigates an innovative and transparent marketplace for large deposits through a unique data set. Traditionally, the process of depositing a large amount of money for firms and organizations is not simple due to the limited overview of such deposits' conditions from banks. On the platform studied in the paper, depositors can however browse through various banks’ offers, including all essential information, and select one just by a simple click. This paper shows that activities on this platform hinge on the mechanism of risk and return trade-offs, and that market transparency indeed prompts member banks to be transparent about their own risk: lower-rated banks typically offer higher deposit rates. The analysis results also suggest that such an innovative platform potentially fosters a competitive and efficient large-deposit marketplace for both banks and depositors.

Overall, the ambition of this thesis is to offer empirical evidence of increased transparency and its implications in the financial markets.