Outside Finance, Dominant Investors and Strategic Transparency

Ernst-Ludwig von Thadden and Enrico Perotti

No 2733, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper studies the incentives for transparency under different forms of corporate governance in a context of product market competition. This Paper endogenizes the governance and financial structure of firms and determines a strategic decision on the degree of transparency in a context of product market competition. When firms seeking outside finance resort to actively monitored debt in order to commit against opportunistic behaviour, the dominant lender can influence corporate transparency. More transparency about a firm's competitive position has both strategic advantages and disadvantages: in general, transparency results in higher variability of profits and output. Thus lenders prefer less information dissemination, as this protects firms when in a weak competitive position, while equityholders prefer more disclosure to maximize profitability when in a strong position. We show that bank-controlled firms will be opaque, while shareholder-run firms prefer more transparency. We can predict a clustering of attributes: bank dominance, established firms with valuable investment, but also significant assets in place, opaqueness, low variability of profits, somewhat lower average profits, and a reversed pattern for equity-controlled firms. Finally, bank control may fail to keep firms less transparent as global trading volumes rise.

Keywords: transparency; Corporate governance; Banking; Disclosure; Imperfect competition; Capital structure; Adverse selection (search for similar items in EconPapers)
JEL-codes: D43 G21 G32 G34 (search for similar items in EconPapers)
Date: 2001-03
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Related works:
Working Paper: Outside Finance, Dominant Investors and Strategic Transparency (2001)
Working Paper: Outside Finance, Dominant Investors and Strategic Transparancy (2001)
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