Working Paper: CEPR ID: DP2733
Authors: Enrico C. Perotti; Ernst-Ludwig von Thadden
Abstract: This Paper studies the incentives for transparency under different forms of corporate governance in a context of product market competition. This Paper endogenizes the governance and financial structure of firms and determines a strategic decision on the degree of transparency in a context of product market competition. 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. 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. Finally, bank control may fail to keep firms less transparent as global trading volumes rise.
Keywords: Adverse Selection; Banking; Capital Structure; Corporate Governance; Disclosure; Imperfect Competition; Transparency
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 |
|---|---|
| bank-controlled firms (G21) | lower transparency (D73) |
| shareholder-run firms (G34) | higher transparency (G38) |
| increased transparency (G38) | higher average profits (D33) |
| higher average profits (D33) | better coordination among firms (L14) |
| less transparent firms (G38) | lower expected profits (D22) |
| less transparent firms (G38) | reduced volatility of profits and output (E39) |
| dominant investors (F23) | distinct transparency behaviors (C92) |
| transparency choice (D79) | impacts market interactions (F61) |
| transparency choice (D79) | impacts overall performance (F69) |