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Outside Finance, Dominant Investors and Strategic Transparency

Author

Listed:
  • Enrico C. PEROTTI
  • Ernst-Ludwig VON THADDEN

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.

Suggested Citation

  • Enrico C. PEROTTI & Ernst-Ludwig VON THADDEN, 2001. "Outside Finance, Dominant Investors and Strategic Transparency," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.02, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:01.02
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    corporate governance; transparency; bank finance; product market competition; capital structure;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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