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Outside Finance, Dominant Investors and Strategic Transparency

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

This Paper studies the incentives for transparency under different forms of corporate governance in a context of product market competition. This Paper endogenizes the governance and financial structure of firms and determines a strategic decision on the degree of transparency in a context of product market competition. 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. We can predict a clustering of attributes: bank dominance, established firms with valuable investment, but also significant assets in place, opaqueness, low variability of profits, somewhat lower average profits, and a reversed pattern for equity-controlled firms. Finally, 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 2733.

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Date of creation: Mar 2001
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Handle: RePEc:cpr:ceprdp:2733
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