Stakeholder, Transparency and Capital Structure

45 Pages Posted: 21 Jan 2004

See all articles by Andres Almazan

Andres Almazan

University of Texas at Austin - Department of Finance

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

Firms that are more highly levered are forced to raise capital more often, a process that leads to the generation of information. Of course, transparency can improve the allocation of capital. When the information about the firm affects the terms under which the firm transacts with its customers and employees, however, transparency can have an offsetting negative effect. Under relatively general conditions, good news improves these terms of trade less than bad news worsens them, implying that increased transparency can lower firm value. In addition, we show that transparency can reduce the incentives of firms and stakeholders to undertake relationship-specific investments, can lead firms to pass up positive NPV investments that require external funding, and can lead firms to choose more conservative capital structures than they would otherwise choose. These effects are likely to be especially important for technology firms that require a reputation for being on the 'leading edge'.

Keywords: Equity issuance, under-investment, market scrutiny, dynamic capital structure

JEL Classification: G30

Suggested Citation

Almazan, Andres and Suarez, Javier and Titman, Sheridan, Stakeholder, Transparency and Capital Structure (January 2004). CEPR Discussion Paper No. 4181. Available at SSRN: https://ssrn.com/abstract=491143

Andres Almazan

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

Javier Suarez (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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