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Stakeholders, Transparency And Capital Structure

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  • Javier Suarez

    ()

  • Andres Almazan

    ()

  • Sheridan Titman

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

Abstract

Firms that are more highly levered are forced to raise capital more often, a process that leads to the generation of information. Of course transparency can improve the allocation of capital. However, when the information about the firm affects the terms under which the firm transacts with its customers and employees, transparency can have an offsetting negative effect. Under relatively general conditions, good news improves these terms of trade less than bad news worsens them, implying than increased transparency can lower firm value. In addition, we show that transparency can reduce the incentives of firms and stakeholders to undertake relationship specific investments, can lead firms to pass up positive NPV investments that require external funding, and can lead firms to choose more conservative capital structures than they would otherwise choose. These effects are likely to be especially important for technology firms that require a reputation for being on the “leading edge”.

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Bibliographic Info

Paper provided by CEMFI in its series Working Papers with number wp2004_0401.

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Date of creation: Jan 2004
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Handle: RePEc:cmf:wpaper:wp2004_0401

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Keywords: Equity issuance; underinvestment; market scrutiny; dynamic; capital structure.;

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References

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Citations

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Cited by:
  1. Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics.
  2. Aleix Calveras & Juan-José Ganuza & Gerard Llobet, 2005. "Regulation And Opportunism: How Much Activism Do We Need?," Working Papers wp2005_0508, CEMFI.
  3. Stephen D. Smith & Larry D. Wall, 2005. "Debt, hedging, and human capital," Working Paper 2005-30, Federal Reserve Bank of Atlanta.
  4. Beatriz Domínguez & Juan José Ganuza & Gerard Llobet, 2005. "R&D in the pharmaceutical industry: A world of small innovations," Economics Working Papers 936, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Elizalde, Abel & Repullo, Rafael, 2004. "Economic and Regulatory Capital: What is the Difference?," CEPR Discussion Papers 4770, C.E.P.R. Discussion Papers.
  6. Marta González & Josep Pijoan-Mas, 2005. "The Flat Tax Reform: A General Equilibrium Evaluation For Spain," Working Papers wp2005_0505, CEMFI.
  7. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.
  8. Natalia Utrero González, 2003. "Banking Regulation, Institutional Framework and Capital Structure: International Evidence from Industry Data," CSEF Working Papers 111, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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