E.-L. von Thadden
- Outside finance, dominant investors and strategic transparency
- Lausanne: Universiti de Lausanne, Ecole des HEC, Dipartement d'Economitrie et d'Economie politique (DEEP)
- Cahiers de Recherches Economiques du Dipartement d'Economitrie et d'Economie politique (DEEP)
- Volume | Edition (Serie)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
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.
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