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Dominant Investors and Strategic Transparency

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  • Enrico C. Perotti

Abstract

This article proposes a theory of corporate transparency and its determinants. We show that under imperfect product market competition, the corporate transparency decision affects the value of equity and debt claims differently. We then embed this insight in a model of endogenous investor influence in which banks may emerge as dominant investors. In line with evidence from continental Europe and Japan, we find that dominant creditors seek to decrease transparency below the level preferred by equity holders. The theory predicts a clustering of firm characteristics that emerge when capital markets are not sufficiently investor friendly to allow arm's-length monitoring: bank dominance, opaqueness, uncertainty about assets in place, low variability of profits, and reduced average profits. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jleo/ewi004
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Bibliographic Info

Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

Volume (Year): 21 (2005)
Issue (Month): 1 (April)
Pages: 76-102

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Handle: RePEc:oup:jleorg:v:21:y:2005:i:1:p:76-102

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  1. Marco Pagano & Fabio Panetta & and Luigi Zingales, 1998. "Why Do Companies Go Public? An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(1), pages 27-64, 02.
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  15. Berglof, Erik & Perotti, Enrico, 1994. "The governance structure of the Japanese financial keiretsu," Journal of Financial Economics, Elsevier, vol. 36(2), pages 259-284, October.
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Citations

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Cited by:
  1. Demirguc-Kunt, Asli & Detragiache, Enrica & Tressel, Thierry, 2006. "Banking on the principles : compliance with Basel Core Principles and bank soundness," Policy Research Working Paper Series 3954, The World Bank.
  2. Degryse, H.A. & Ongena, S., 2000. "Bank Relationship and Firm Profitability," Discussion Paper 2000-14, Tilburg University, Center for Economic Research.
  3. Enrica Detragiache & Thierry Tressel & Asli Demirgüç-Kunt, 2006. "Bankingon the Principles," IMF Working Papers 06/242, International Monetary Fund.
  4. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2004. "The Political Economy of Dominant Investors," Tinbergen Institute Discussion Papers 04-091/2, Tinbergen Institute.
  5. Van Tassel, Eric, 2011. "Information disclosure in credit markets when banks' costs are endogenous," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 490-497, February.
  6. Enrico Perotti & Ernst-Ludwig von Thadden, 2005. "The Political Economy of Corporate Control," Tinbergen Institute Discussion Papers 05-102/2, Tinbergen Institute.
  7. Overfelt, Wouter Van & Annaert, Jan & Ceuster, Marc De & Deloof, Marc, 2009. "Do universal banks create value? Universal bank affiliation and company performance in Belgium, 1905-1909," Explorations in Economic History, Elsevier, vol. 46(2), pages 253-265, April.
  8. Forssbaeck, Jens & Oxel, Lars, 2014. "The Multi-faceted Concept of Transparency," Working Paper Series 1013, Research Institute of Industrial Economics.
  9. Marquez, Robert, 2010. "Informed lending as a deterrent to predation," Finance Research Letters, Elsevier, vol. 7(4), pages 193-201, December.
  10. Hilary, Gilles, 2003. "Accounting behavior of German firms after an ADR issuance," The International Journal of Accounting, Elsevier, vol. 38(3), pages 355-376.

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