Transparency, Value Creation, and Financial Crises

The purpose of this study is to analyze the impact of the level of corporate transparency on a market-based measure of shareholder value creation (Fernandez, 2002) during periods of financial crisis. Our sample consists of Spain's IBEX35 stock index constituents during the ten year period of 2000-2010. We use earnings management (EM) as an inverse indicator of the quality of disclosure and carry out fixed effects regressions that adjust for firm and industry characteristics, two periods of financial crises and the passage of time. When we analyze both the manner in which shareholder value creation is related to EM as well as the influence of crises, we find that (1) firms with lower disclosure quality generate less value for their shareholders and (2) firms that manage their earnings expose their shareholders to greater wealth destruction during periods of financial turmoil. With the still unfolding impact of the recent global financial crisis, as observed in the current debt crisis in Western European countries, our study evidences the importance of current debate over the benefits and costs of increasing the regulation of financial markets, especially in the areas of transparency and disclosure requirements