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Outside Finance, Dominant Investors and Strategic Transparency

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Author Info
Enrico C. PEROTTI
Ernst-Ludwig VON THADDEN

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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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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 01.02.

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Length: 35 pages
Date of creation: Jan 2001
Date of revision:
Publication status: 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 ?"
Handle: RePEc:lau:crdeep:01.02

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

For technical questions regarding this item, or to correct its listing, contact: (Claudine Delapierre Saudan).

Related research
Keywords: corporate governance; transparency; bank finance; product market competition; capital structure;

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Find related papers by JEL classification:
D4 - Microeconomics - - Market Structure and Pricing
G3 - Financial Economics - - Corporate Finance and Governance
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

References listed on IDEAS
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