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Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?

Published online by Cambridge University Press:  06 April 2009

Enrico C. Perotti  and
Ernst-Ludwig Von Thadden
Enrico C. Perotti
Affiliation:
enrico@fee.uva.nl, University of Amsterdam, Department of Financial Management, Roeterstraat 11, Amsterdam, WB 1018, Netherlands and CEPR;
Ernst-Ludwig Von Thadden
Affiliation:
elu.vonthadden@hec.unil.ch, Université de Lausanne, Lausanne, CH-1015, Switzerland, FAME, and CEPR.
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Abstract

Dominant investors can influence the publicly available information about firms by affecting the cost of information collection. Under strategic competition, transparency results in higher variability of profits and output. Thus, lenders prefer less transparency, since this protects firms when in a weak competitive position, while equity holders prefer more. Market interaction creates strategic complementarity in gathering information on competing firms, thus entry by transparent competitors will improve price informativeness. Moreover, as the return to information gathering increases with liquidity, increasing global trading may undermine the ability of bank control to keep firms opaque.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 1 , March 2003 , pp. 61 - 86
Copyright
Copyright © School of Business Administration, University of Washington 2003

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