Toward Transparency: New Approaches and Their Application to Financial Markets
ferrinoTara Vishwanath • Daniel Kaufmann
The Asian financial crisis in the late 1990s not only highlighted the welfare conquences of transparency in the financial ctor but also linked this relatively narrow problem to the broader context of transparency in governance. It has been obrved that objections to trans-parency, often on flimsy pretexts, are common even in industrialized countries. This article argues that transparency is indispensable to the financial ctor and describes its desirable characteristics: access, timeliness, relevance, and quality. The authors emphasize the need to weigh the costs and benefits of a more transparent regulatory policy, and they explore the connection between information imperfections, macroeconomic policy, and questions of risk. The article argues for developing institutional infrastructure, standards, and accounting prac-tices that promote transparency, implementing incentives for disclosure and establishing regulations to minimize the perver incentives generated by safety net arrangements, such as deposit insurance. Becau institutional development is gradual, the authors contend that relatively simple regulations, such as limits on credit expansion, may be the most reason-able option for developing countries. They show that transparency has absolute limits becau of the lack of adequate enforcement and argue that adequate enforcement may be predicated on broa
der reforms in the public ctor.
Among policymakers there is growing recognition of the importance of transpar-ency to the mechanisms that sustain welfare and development—economic mar-kets and institutions of governance. In the economic sphere greater availability of reliable and timely information improves resource allocation, enhances efficiency, and increas the prospects for growth. In the recent literature on financial cris, lack of transparency is cited as one of the factors that either caud or contributed to the prolonged cris.1 This literature also highlights the possible links between transparency, good governance, and economic stability. Greater openness and wider information sharing enable the public to make informed political decisions, improve the accountability of governments, and reduce the scope for corruption. Nonetheless, many otherwi open and democratic societies have adopted regula-The World Bank Rearch Obrver, vol. 16, no. 1 (Spring 2001), pp. 41–57
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tions that curtail transparency not only in financial markets but also in the broader sphere of governance.
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Despite the perceived importance of transparency, few theoretical or empirical stud-ies have examined its role in enhancing long-term growth and improving the stabil-ity of markets. Conceptual work suggests that incread transparency may not en-hance welfare and may in fact increa market volatility (e Furman and Stiglitz 1998 for examples). The abnce of empirical work derives in part from the difficulty of identifying and measuring “transparency,” given that it deals with agents who are hiding information. Thus, the challenge is to define a measure of transparency that is empirically tractable. Such an exerci will highlight the requirements of the data as well as enable us to asss its determinants and evaluate its impact on the outcomes of interest.
This article reviews the existing literature on transparency, focusing on its role in promoting greater financial stability and highlighting remaining gaps in knowledge. Three specific challenges are discusd: meeting infrastructure needs by developing standards for quality, compliance, and enforcement; addressing regulatory needs by improving incentives for better disclosure; and installing countervailing regulations to minimize perver incentives, such as tho induced by deposit insurance or bail-out schemes. To this end we also discuss the role of international organizations in helping design and implement the broader and more complex disclosure requirements demanded by the integration of world financial markets and the growth of innova-tive financing mechanisms.
Defining and Measuring Transparency
For the purpos of this article, transparency describes the incread flow of timely and reliable economic, social, and political information about investors’ u of loans; the creditworthiness of borrowers; government’s provision of public rvices, such as education, public health, and infrastructure; monetary and fiscal policy; and the activities of international institutions. Alternatively, a lack of transparency may exist if access to information is denied, if the information given is irrelevant to the issue at hand, or if the information is misreprented, inaccurate, or untimely. The agent responsible for the lack of transparency may be a government minister, a pub-lic institution, a corporation, or a bank. Thus, a working understanding of transpar-ency should encompass such attributes as access, comprehensiveness, relevance, quality, and reliability.
•Access. Laws and regulations ensure (at least in principle) that information is available to all. But information must also be accessible. Accessibility is aided by the institutions and venues that facilitate its flow, including newspapers, 42
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radio, television, public notices, the Internet, and word of mouth. Lack of edu-cation is detrimental to
transparency becau it limits an individual’s ability to access, interpret, and respond to information. Although strong equity consider-ations underlie the need for access, it is often profitable to delay or to limit access to uful information, in which ca access becomes hostage to the ability to pay.
There is thus a need to enforce timely and equitable dismination of information.
•Relevance. Ensuring that information is relevant is difficult becau relevance may depend on the needs of the ur. For example, depositors need information to en-sure the safety of deposits, investors need information about liabilities and risks, and the public needs information about current economic conditions, government policies, and so forth. Paradoxically, as sources of information, such as the Internet, proliferate, information overload threatens to dilute the ideal of relevance.
•Quality and reliability.To be effective, information should be fair, reliable, timely, complete, consistent, and prented in clear and simple terms. Quality standards must be t and then monitored by external agencies or auditors or by the standard-tting organizations. Consistency in the process ud to obtain information and in the formats of the information disminated ensures comparability and so allows the individual to asss changes in the data over time. The criteria and methodologies ud for gathering and interpreting the information, as well as any changes in method
ologies, should be fully disclod to prevent the deliber-ate withholding or distortion of information. Dishonest reporting can be de-terred by the u of various watchdog institutions, ranging from professional accountants, credit agencies, the press, stakeholders, and even academic re-archers (Kane 2000). Ensuring data quality and reliability is often a meth-odological and empirical challenge even for institutions and individuals of the highest probity.
Measuring Openness
Conceptually, a statistical measure of transparency is the precision of the informa-tion that is obtained, which is in turn a function of its quality and relevance. Lack of transparency in the ca of accounting information, for example, may be measured by comparing a firm’s officially disclod balance sheet information with the asss-ments of auditing agencies that investigate firms for credit approval. In a highly transparent firm, there will be little discrepancy between the officially disclod in-formation and that provided by the auditors. (Of cour, a prerequisite for such mea-surement is the public availability of the information.)
A rious impediment to measuring transparency is poor data quality—a lack of detailed information on publicly disclod information, on the various disclosure stan-dards, and on evaluations by indep
endent auditors of the categories of information disclod. With improved data, one can systematically measure transparency, iden-Tara Vishwanath and Daniel Kaufmann43
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tify its determinants, and quantify its impact on the relevant economic variables.2 Recent attempts to measure transparency have ud such proxies as a “weak rule of law” and “corruption” that are linked to a lack of openness but who abnce does not necessarily ensure transparency. This approach can be refined by formulating an index using proxies for the characteristics required. An attempt to construct an index of financial transparency is described later in this article.
Limits to Transparency?
Is transparency always desirable? Proscriptions against disclosure abound in all so-cieties. Is there a legitimate reason for withholding certain information?risk的用法
As Stiglitz (1999) has argued, societies’ preferences should favor greater openness and transparency. The economics literature supports the notion that better informa-tion will improve resource allocation and efficiency. Disclosing financial information directs capital to its most productive us, leading to efficiency and growth. Lack of transparency can be costly both politically and economically. It is politically debili-tating becau it dilutes the ability of the democratic system to
judge and correct government policy by cloaking the activities of special interests and becau it cre-ates rents by giving tho with information something to trade. The economic costs of crecy are staggering, affecting not only aggregate output but also the distribu-tion of benefits and risks. The most significant cost is that of corruption, which ad-verly affects investment and economic growth.3
Although arguments against transparency may be justified in a few instances on the grounds of privacy and confidentiality, tho who hold this position need to counter not only the instrumental benefits of transparency but also powerful argu-ments about the rights of citizens to know. More dubious exceptions to transparency are tho advanced on the grounds of national curity, stability, tactical negotia-tions, or deference to public unity. Such exceptions may be warranted in certain narrow circumstances, but reductions in transparency should be limited, and the limits expod to public debate. Particular scrutiny should be directed at invocations of confidentiality, market stability, or national curity.
Rearch to inform such debates fails to qualify the arguments for and against transparency. For example, arguments about the need to limit the transparency of policy tting by a country’s central bank are not borne out empirically, although a theoretical literature is willing to entertain the notion. T
heoretically, a greater and less volatile flow of information about the decisions of the central bank should be just as likely to stabilize and rationalize financial markets as it is to disrupt and corrupt them. Indeed, it is probably true that the less accountable the agency, the more trans-parent it should be. It is not evident, however, that more information can strengthen financial systems. Furman and Stiglitz (1998) cite examples in which more informa-tion may worn credit rationing or increa price volatility. Clearly, more rearch, 44
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both conceptual and empirical, is needed to resolve this debate and its implications for the behavior and incentives of firms and individuals and for economic outcomes. Limits to Voluntary Disclosure
Although transparency may be desirable, markets rarely induce socially desirable levels of transparency, not to mention full and voluntary disclosure of information. There are many reasons why this is so. First, costs are associated with such disclo-sure. Collecting, organizing, and disminating information requires time, effort, and money. Agents will thus reveal information up to the point where the marginal ben-efit from disclosure equals marginal cost—typically that point is reached before full disclosure. Second, positive payoffs may come from nondisclosure. For example,
where agents interact with each other strategically, revealing more information may result in a loss of competitive advantage, which in turn might reduce the firm’s prof-itability. Moreover, nondisclosure allows the individual who has the information to benefit from it by offering the information at a price, which leads to innovation. For example, it is precily becau hedge funds are not transparent that they are able to generate profits. If their arbitrage strategies were known, they could be replicated. In such circumstances disclosure regulation may not be desirable; given the costs, voluntary disclosure may be socially optimal (Fishman and Haggerty 1997).
Third, the prence of externalities may limit the disclosure of information. Exter-nalities may ari when firms’ values are correlated, so that information pertaining to one firm may be ud to value other firms. Theoretical work suggests that such information spillovers hamper economic efficiency and prevent entrepreneurs and firms from attaining the socially optimum level of information (Admati and Pfleiderer 2000). Externalities also explain why markets underinvest in monitoring and enforc-ing rules to ensure transparency. In part, this must be ascribed to the fact that tho who monitor and enforce provide a benefit to all yet receive no recompen from other beneficiaries.
The “public-good” properties of information suggest that government should take care to protect the public by creating rules and regulations specifying disclosure re-quirements about categories of infor
mation, frequency of disclosure, and standards for disclod information. Moreover, transparency alone cannot always ensure the production of reliable information; in such cas, there may be a need to impo ac-countability through enforcement. Generally, the benefits of transparency are lim-ited by the inherent difficulties of obtaining information in rapidly changing envi-ronments. For example, sophisticated financial instruments that would make timely asssments of the net worth of banks and firms are unreliable becau markets re-spond to constant changes in external factors. Achieving transparency therefore may not be sufficient. Enforcement mechanisms that ensure accountability by punishing fraudulent behavior are also esntial. In such circumstances, regulations may be Tara Vishwanath and Daniel Kaufmann45
necessary to minimize risks and ensure stability. Such regulations need to balance the costs and benefits from incread disclosure in distinct circumstances. Regulation in Context
In general, disclosure regulation that either mandates or encourages transparency may be justified when externalities are prent and information is costly. The deci-sion to introduce disclosure regulation, however, as well as the specific implementa-tion of such regulation, warrants careful consideration.
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First, policymakers must determine whether greater transparency would nec-essarily improve economic outcomes (Furman and Stiglitz 1998). According to Hirshleifer (1971) in certain instances more information may cau speculation and lead to greater market volatility.A more recent study by Bushee and Noe (2000) finds that improvements in disclosure practices are correlated with subquent increas in stock market volatility. Apparently, a policy of greater disclosure skews the compo-sition of investors toward tho with a strong propensity to risk; the prevalence of fickle traders willing to buy and ll in hopes of short-term gain leads to greater volatility.
theriddleSecond, where full disclosure is justified, policymakers must determine the kinds of information to be disclod, the agents required to provide the information and verify its quality, and the enforcement required to ensure compliance. The literature suggests that in some circumstances policy should support only certain kinds of dis-closure. Blinder (1998) argues that transparency of central bank policies makes the bank’s reputation more nsitive to the outcomes of its policies. Faust and Svensson (1998) qualify this position, arguing that if the central bank’s reputation is completely independent of its actions, the public los an important constraint on the bank’s behavior.Their theoretical modeling suggests that the results may be higher-than-average and more variable inflation and unemployment. However, this report has not been confirmed empirically. In an attempt
at striking a balance on this issue, the U.S. Federal Rerve Board releas minutes of open-market committee meetings with a six-week lag, deleting confidential information on the names of individuals, foreign banks, and so forth.
怎么缓解焦虑的症状Third, once the extent and nature of disclosure have been decided, regulation poli-cies should be tailored to local circumstances, that is, to the specific institutional and market environment. In developing countries with weak institutional and legal en-vironments, the state must assume a greater role for providing information. As coun-tries develop, the private ctor often evolves to meet information needs. In the United States, for example, such institutions as the New York Stock Exchange (a cartel of traders that ts commissions and limits entry) subject companies that apply for list-ing on the exchange to stringent screening that encourages voluntary disclosure and prevents purely speculative or bogus ventures from being listed.
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