An Inverted U-shaped Relationship between Information Transparency and Idiosyncratic Risk

Prior literature indicates that the endogeneity problem exists between information transparency and idiosyncratic risk, and that the results of the impact of transparency on risk are still inconclusive. This study attempts to employ a simultaneous equation model to investigate the non-linear relationship between information transparency and idiosyncratic risk. The variables of firm’s information transparency are drawn from the “Annual Report on China’s Companies’ Public Transparency” published by the China Social Science Academic Press. The finding indicates that an inverted U-shaped relationship exists between information transparency and idiosyncratic risk. The empirical result of the non-linear relation not only confirms the disclosure theory that the relationship between information transparency and idiosyncratic risk is negative, but also explains the inconsistent evidence in previous research.