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Stakeholders, Transparency and Capital Structure

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  • Almazan, Andres
  • Suarez, Javier
  • Titman, Sheridan

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. When the information about the firm affects the terms under which the firm transacts with its customers and employees, however, 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 that 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4181.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4181

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Keywords: dynamic capital structure; equity issuance; market scrutiny; under-investment;

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Cited by:
  1. Díaz-Giménez, Javier & Pijoan-Mas, Josep, 2006. "Flat Tax Reforms in the US: A Boon for the Income Poor," CEPR Discussion Papers 5812, C.E.P.R. Discussion Papers.
  2. 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.
  3. Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
  4. Aleix Calveras & Juan-José Ganuza & Gerard Llobet, 2005. "Regulation And Opportunism: How Much Activism Do We Need?," Working Papers wp2005_0508, CEMFI.
  5. Abel Elizalde & Rafael Repullo, 2004. "Economic And Regulatory Capital. What Is The Difference?," Working Papers wp2004_0422, CEMFI.
  6. Stephen D. Smith & Larry D. Wall, 2005. "Debt, hedging, and human capital," Working Paper 2005-30, Federal Reserve Bank of Atlanta.
  7. Marta González & Josep Pijoan-Mas, 2005. "The Flat Tax Reform: A General Equilibrium Evaluation For Spain," Working Papers wp2005_0505, CEMFI.
  8. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.

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