Outside Finance, Dominant Investors and Strategic Transparency


Outside Finance, Dominant Investors and Strategic Transparency


ENRICO C. PEROTTI
University of Amsterdam; Centre for Economic Policy Research (CEPR)
ERNST-LUDWIG VON THADDEN
Université de Lausanne - Department of Economics; Centre for Economic Policy Research (CEPR)


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 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.

Keywords: Capital Structure, Transparency, Corporate Governance, Imperfect Competition, Outside Finance


JEL Classifications: G31

Working Paper Series

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Contact Information for ENRICO C. PEROTTI (Contact Author)


E.C.Perotti@uva.nl (Email address for ENRICO C. PEROTTI )
University of Amsterdam
Roetersstraat 18
Finance Group
Amsterdam 1018 WB
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)


(No e-mail address available for ENRICO C. PEROTTI )
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom


Contact Information for ERNST-LUDWIG VON THADDEN


ELU.VONTHADDEN@HEC.UNIL.CH (Email address for ERNST-LUDWIG VON THADDEN )
Université de Lausanne - Department of Economics
DEEP, BFSH 1
Lausanne 1015
Switzerland
+41 21 692 3477 (Phone)
+41 21 692 3365 (Fax)


(No e-mail address available for ERNST-LUDWIG VON THADDEN )
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom




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