Financial catastrophes caused by lack of transparency, Stanford paper says

Sept. 27, 2012, 1:37 a.m.

Financial catastrophes – such as the 2007 subprime mortgage crisis – owe their timing as much to a lack of transparency and disclosure as to underlying economic weaknesses, according to Stanford researchers.

In a draft paper, Ilan Guttman, assistant professor of accounting at the Graduate School of Business, and Ilan Kremer, professor of finance, argue that panicky investor behavior, such as that which prompted the spread of the 2007 crisis to global financial markets, results in part from managers’ reluctance to disclose bad news in times of crisis.

The sudden disclosure of bad news from one company, according to the researchers, makes investors more risk-averse while often prompting them to make up losses by selling assets in other sectors. This promotes a more general capital flight.

The paper suggests instead a greater level of transparency by firms in times of crisis to mitigate investors’ reliance on rumor and speculation.


— Marshall Watkins

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