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Stakeholders, Transparency And Capital Structure

  • Javier Suarez

    ()

  • Andres Almazan

    ()

  • Sheridan Titman

    ()

    (CEMFI, Centro de Estudios Monetarios y Financieros)

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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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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