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Outside Finance, Dominant Investors and Strategic Transparancy

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Author Info
Enrico C. Perotti () (University of Amsterdam, and CEPR)
Ernst-Ludwig von Thadden (Université de Lausanne, and CEPR)

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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.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-019/2.

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Date of creation: 08 Feb 2001
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Handle: RePEc:dgr:uvatin:20010019

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Cited by:
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  1. Mehari Mekonnen Akalu, 2002. "Measuring and Ranking Value Drivers," Tinbergen Institute Discussion Papers 02-043/2, Tinbergen Institute. [Downloadable!]
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