Liquidity, Accounting Transparency, and the Cost of Capital: Evidence from Real Estate Investment Trusts

We investigate the influence financial transparency, organizational complexity, and the cost of capital exert over financial market liquidity. Given regulatory distribution requirements, real estate investment trusts (REITs) are forced to frequently raise capital in the public markets. As a result, they have strong incentives to transparently communicate their financial condition to the marketplace. Within this context, we find strong evidence that firms choosing to “over-invest” in financial transparency are rewarded with enhanced liquidity, as measured by lower bid-ask spreads. These effects are more pronounced for riskier firms and those with greater growth options (i.e., those with the most to gain from transparency).