Working Paper: NBER ID: w13647
Authors: Andres Almazan; Javier Suarez; Sheridan Titman
Abstract: We develop a model of a firm whose production process requires it to start and nurture a relationship with its stakeholders. Because there are spillover benefits associated with being associated with a "winner," the perceptions of stakeholders and potential stakeholders can affect firm value. Our analysis indicates that while transparency (i.e., generating information about a firm's quality) may improve the allocation of resources, a firm may have a higher ex ante value if information about its quality is not prematurely generated. The costs associated with transparency arise because of asymmetric information regarding the extent to which stakeholders benefit from having a relationship with a high quality firm. These costs are higher when firms can initiate non-contractible innovative investments that enhance the value of their stakeholder relationships. Stakeholder effects of transparency are especially important for younger firms with less established track records (e.g., start-ups).
Keywords: No keywords provided
JEL Codes: D21; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transparency (d) (Y40) | resource allocation (H61) |
| transparency (d) (Y40) | stakeholder engagement (O36) |
| transparency (d) (Y40) | firm value (G32) |
| transparency (d) (Y40) | timing of quality revelation (t2 or t3) (L15) |
| timing of quality revelation (t2 or t3) (L15) | stakeholder retention (G35) |
| timing of quality revelation (t2 or t3) (L15) | firm revenue (y) (D22) |
| transparency (d) (Y40) | investments (z) in innovation (O39) |
| uncertainty about firm's quality (L15) | varying compensation requirements (J33) |
| varying compensation requirements (J33) | firm's ability to attract and retain stakeholders (L21) |
| transparency (d) (Y40) | expected rents appropriated by stakeholders (R21) |
| expected rents appropriated by stakeholders (R21) | stakeholder behavior (G34) |
| stakeholder behavior (G34) | firm outcomes (G32) |