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The study specifically examined transparency efforts by the U.S. Federal Reserve and their impact on the stock markets.Peshkova/iStockphoto

The Globe’s bimonthly report on research from business schools.

Transparency is a widely held goal for modern business organizations. It stands for openness, accountability, clarity and communication, and often guides internal and external policies of disclosing information to the public.

But is greater transparency in business always a good thing? A recent study from the University of Toronto Scarborough suggests that even the best intentions can have unintended consequences.

The study, led by assistant professor of finance Charles Martineau and to be published in the Journal of Financial and Quantitative Analysis, specifically examined transparency efforts by the U.S. Federal Reserve.

The Federal Open Market Committee (FOMC) sets monetary policy on behalf of what is better known as “the Fed.” The committee holds eight meetings a year on fixed dates and issues a statement each time. In 2011, then-Fed chair Ben Bernanke introduced news conferences following half of the meetings in a bid to increase transparency and accountability in the wake of the U.S. financial crisis.

Analyzing stock market data between 2011 and 2017, Dr. Martineau detected a curious pattern tied to the Fed’s change in policy. Notably, investors treated the two types of meetings differently, expecting more important announcements from meetings scheduled with a news conference than from those without.

“There are eight FOMC announcements per year, and I saw high positive returns [in the markets], no returns, high positive returns, no returns, and so on – essentially a zig-zag in returns in the minutes returns of each announcement,” says Dr. Martineau in an e-mail.

The data suggests that, though the aim was to better manage expectations of investors, the Fed’s transparency efforts had the opposite effect, setting up the markets for unnecessary swings.

“Having some meetings that were perceived as more important [those with a news conference] than others [no news conference], makes it more difficult for central bankers to manage expectations. If they need to announce important news at a meeting with no press conference and the market did not anticipate anything important, they will surprise markets,” he says.

Although the Fed insisted all meetings were equal, investors weren’t the only ones who perceived a difference. Public comments and meeting transcripts showed even FOMC members sometimes considered putting off important decisions until a meeting where the decisions could be explained at an accompanying news conference. That could reduce transparency through potential delays in releasing information, the researchers say.

Recently, the Fed announced that it will start holding news conferences after every FOMC meeting – a move Dr. Martineau and the research team support.

“Our research shows that it is very important for central banks to treat all of their meetings equally, because investors really go after cues,” he says.

Dr. Martineau says that finding also applies to the Bank of Canada, which typically holds news conferences following a public announcement on interest rates. In an appendix to the study, research suggests that in the day leading up to such an announcement, investors pay more attention to the central bank if a news conference is scheduled.

Broadly, Dr. Martineau says the study contributes to the theoretical debate around whether greater transparency is always a good thing.

“Yes, press conferences can be perceived as making the Fed more transparent but at what cost? We argue that there is a cost – making it more difficult to manage expectations.”

Corporations face the same issue.

“Should they engage in earnings guidance? Yes, it makes firms more transparent because the managers provide their view about the future performance of the company at the next quarterly earnings, but does this lead investors to be fixated on short-term performance rather than long-term performance?” he asks.

The study is co-authored by Oliver Boguth of the Carey School of Business at Arizona State University and Vincent Grégoire of HEC Montréal.

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