How does transparency affect bank financial performance?

Theoretical studies suggest that increased transparency reduces a firm's cost of capital (Diamond & Verrecchia, 1991). Thus, more transparency should improve financial performance. We examine the relation between firm transparency and bank holding company (BHC) profit efficiency using the number of analysts following a BHC and the standard deviation of analysts' EPS forecasts to measure transparency. Our hypothesis is that more transparent BHCs are better managed, causing a positive relation between transparency and profit efficiency. The empirical results confirm that transparency has a positive effect on profit efficiency.