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Discussion Paper Details

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Title: Dominant Investors and Strategic Transparency

Author(s): Enrico C Perotti and Ernst-Ludwig von Thadden

Publication Date: October 1998

Keyword(s): bank governance, Competition, disclosure, market microstructure and Transparency

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Perotti, E and von Thadden, E. 1998. 'Dominant Investors and Strategic Transparency'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1948