Transparency and Price Discovery: Evidence from the Taiwan Stock Exchange

This paper analyzes the impact of pre-trade transparency on price discovery. On January 1, 2003, the Taiwan Stock Exchange discloses unexecuted orders of the best five bid and ask prices to market participants. This rule change provides an opportunity to examine the impact of transparency on price discovery. The sample involves 500 stocks listed on the Taiwan Stock Exchange over the one-year period from July 1, 2002 to June 31, 2003. The empirical results indicate a significant improvement in price discovery following the rule change in transparency. The adjusted R-squares of the estimated market model increase significantly for both open-to-open returns and close-to-close returns in the post-period. The results remain robust for quintiles ranked on the basis of trading volume.