Outside Finance, Dominant Investors and Strategic Transparency

35 Pages Posted: 27 Feb 2001

See all articles by Enrico C. Perotti

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2000

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 Classification: G31

Suggested Citation

Perotti, Enrico C. and von Thadden, Ernst-Ludwig, Outside Finance, Dominant Investors and Strategic Transparency (January 2000). Available at SSRN: https://ssrn.com/abstract=256229 or http://dx.doi.org/10.2139/ssrn.256229

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ernst-Ludwig Von Thadden

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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