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Dominant Investors and Strategic Transparency

Author

Listed:
  • Enrico C. Perotti

    (University of Amsterdam and CEPR)

  • Ernst-Ludwig von Thadden

    (University of Lausanne and CEPR)

Abstract

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 more 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 comparitive statics show that bank control may fail to keep firms less transparent as global trading volumes rise.

Suggested Citation

  • Enrico C. Perotti & Ernst-Ludwig von Thadden, 1999. "Dominant Investors and Strategic Transparency," Working Papers 1999.24, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:1999.24
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    References listed on IDEAS

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    Cited by:

    1. Demirgüç-Kunt, AslI & Detragiache, Enrica & Tressel, Thierry, 2008. "Banking on the principles: Compliance with Basel Core Principles and bank soundness," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 511-542, October.
    2. Forssbaeck, Jens & Oxel, Lars, 2014. "The Multi-Faceted Concept of Transparency," Working Paper Series 1013, Research Institute of Industrial Economics.
    3. Van Tassel, Eric, 2011. "Information disclosure in credit markets when banks' costs are endogenous," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 490-497, February.
    4. Hilary, Gilles, 2003. "Accounting behavior of German firms after an ADR issuance," The International Journal of Accounting, Elsevier, vol. 38(3), pages 355-376.
    5. Overfelt, Wouter Van & Annaert, Jan & Ceuster, Marc De & Deloof, Marc, 2009. "Do universal banks create value? Universal bank affiliation and company performance in Belgium, 1905-1909," Explorations in Economic History, Elsevier, vol. 46(2), pages 253-265, April.
    6. Marquez, Robert, 2010. "Informed lending as a deterrent to predation," Finance Research Letters, Elsevier, vol. 7(4), pages 193-201, December.

    More about this item

    Keywords

    Transparency; Bank control; product market competition;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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