The SEC's Enforcement Record against Auditors

Transparency has two dimensions that financial economists and accounting experts tend to analyse separately even though they are closely related. The first dimension concerns the process of security trading: a security market is transparent insofar as its participants are aware of each others' behaviour (e.g. know current bid and ask quotes or recent transaction prices). The second dimension of transparency instead depends on the disclosure decisions of companies: it concerns how much information investors have about company 'fundamentals'. In most cases, both forms of transparency lower transaction costs, and ultimately benefit firms via lower cost of capital and/or better access to external finance. But they may also impose some costs on firms which in some cases may opt for a degree of transparency that is socially inefficient, This in turn could create a rationale for regulatory intervention. Moreover, the two types of transparency are not independent of each other: for instance, if markets are very transparent, firms may want to be less transparent.