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Dominant Investors and Strategic Transparency

  • Perotti, Enrico C
  • von Thadden, Ernst-Ludwig

This paper studies product market competition under a strategic transparency decision. Dominant investors can influence information collection in the financial market, and thereby corporate transparency, by affecting market liquidity or the cost of information collection. More transparency on 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 revelation through stock market trading, since this protects firms when in a weak competitive position, while equityholders prefer to make full use of the strategic advantage of a strong firm. We show that bank-controlled firms will tend to discourage trading to reduce price informativeness, while shareholder-run firms prefer more transparency. Our comparative statics show that bank control may fail to keep firms less transparent as global trading volumes rise.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1948.

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Date of creation: Oct 1998
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Handle: RePEc:cpr:ceprdp:1948
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  1. Marco Pagano & Fabio Panetta & Luigi Zingales, . "Why Do Companies Go Public? An Empirical Analysis," CRSP working papers 330, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  15. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
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  17. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
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