Outside Finance, Dominant Investors and Strategic Transparency

Enrico Perotti and Ernst-Ludwig von Thadden

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper studies optimal financial contracts and product market competition under a strategic transparency decision. 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. In fact, we can predict a clustering of characteristics associated with bank dominance: opaqueness, low variability of profits, slightly reduced average profits, uncertainty about assets in place, and relatively high financing needs all should be observed jointly for bank controlled firms.

Keywords: corporate governance; transparency; bank finance; product market competition; capital structure (search for similar items in EconPapers)
JEL-codes: D4 G3 L2 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2001-01
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Published in the Journal of Financial and Quantitative Analysis, vol. 38 (1), March 2003, pp. 61-85, under the title "Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Govervance ?"

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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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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:01.02

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