The state in which all relevant information is fully and freely available to the public. Nearly every analyst agrees that transparent markets are desirable because they lead to greater efficiency
. Laws and regulations
exist in most jurisdictions encouraging or mandating transparency. For example, the SEC
requires disclosure forms declaring a great many different actions when or immediately after they occur. Likewise, the Sarbanes-Oxley Act
is designed to increase transparency in accounting
. A minority view holds that these laws and regulations intended to create transparent markets in fact reduce efficiency. Others contend that markets are efficient with or without transparency. See also: Efficient market hypothesis
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The full, accurate, and timely disclosure of information.
Case Study Ford Motor Company executives indicated in spring 2001 that the company planned to provide shareholders and analysts with greater transparency of the firm's financial results. As part of the improved transparency, Ford was expected to report separate results from its Premier Automotive Group (PAG), comprising Aston Martin, Jaguar, Lincoln, Land Rover, and Volvo Cars. In the prior year Ford reported an operating loss of $35 million in Europe only because income from PAG and customer services mostly offset operating losses of nearly $1 billion in its other European operations. At the time Ford did not report profits for individual brands or product groups. Transparency permits shareholders and analysts a greater understanding of a firm's operations, including which parts of the firm are most and least profitable. This, in turn, places greater pressure on the firm's management to produce acceptable results in all facets of a company's operations.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
Transparency is a measure of how much information you have about the markets where you invest, the corporations whose stocks or bonds you buy, or the mutual funds or other investments you select.
For example, in order to achieve maximum transparency in US markets, the Securities and Exchange Commission (SEC) requires corporations to disclose all information that might have an impact on their financial status so that investors can make fully informed decisions.
Real-time trading information, increasingly available to individuals as well as institutional investors, and linked pricing systems are other steps toward complete transparency.