FEEM working papers "Note di lavoro" series
1999 .024

Dominant Investors and Strategic Transparency


Authors: Enrico C. Perotti, Ernst-Ludwig von Thadden
Series: Economy and Society
Editor: Fausto Panunzi
Type: Journal
JEL: Journal of Financial and Quantitative Analysis

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 more 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 comparitive statics show that bank control may fail to keep firms less transparent as global trading volumes rise.

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