Working Paper: CEPR ID: DP1948
Authors: Enrico C. Perotti; Ernst-Ludwig von Thadden
Abstract: This paper studies product market competition under a strategic transparency decision. Dominant investors can influence information collection in the financial market, and thereby corporate transparency, by affecting market liquidity or the cost of information collection. More transparency on 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 revelation through stock market trading, since this protects firms when in a weak competitive position, while equityholders prefer to make full use of the strategic advantage of a strong firm. We show that bank-controlled firms will tend to discourage trading to reduce price informativeness, while shareholder-run firms prefer more transparency. Our comparative statics show that bank control may fail to keep firms less transparent as global trading volumes rise.
Keywords: transparency; bank governance; disclosure; market microstructure; competition
JEL Codes: D43; G21; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dominant investor types (F23) | information collection (C80) |
| information collection (C80) | corporate transparency (G38) |
| corporate transparency (G38) | market liquidity (G10) |
| bank-controlled firms (G21) | discourage trading (F13) |
| shareholder-run firms (G34) | prefer transparency (H57) |
| increased transparency (G38) | higher variability in profits (L25) |
| increased transparency (G38) | higher output (E23) |
| competition among equity-dominated firms (P12) | more information dissemination (D83) |
| lender-dominated firms (G21) | uninformative prices (D41) |
| global trading volumes (F10) | bank control may fail to keep firms less transparent (G38) |