Firms' Stakeholders and the Costs of Transparency


  • We are grateful for comments from Aydogan Alti, Kent Daniel, Adolfo de Motta, Mark Flannery, Xavier Freixas, Ron Giammarino, Maria Gutierrez, Thomas Hellmann, David Hirshleifer, Giovanna Nicodano, Robert Prentice, Chris Parsons, Todd Pulvino, Scott Stern, Siew Hong Teoh, two anonymous referees, and seminar participants at University of Amsterdam, Arizona State University, ESCP-EAP, INSEAD, Instituto de Empresa, LSE, McGill University, NYU, Northwestern University, Ohio State University, Oxford, Pompeu Fabra, UCLA, University of Texas, Tulane University, the CEPR workshop on European Corporate Governance and the New Economy, the WFA meetings, the NBER Entrepreneurship: Strategy and Structure Conference, and the Final ECGTN Conference. Suarez acknowledges financial support from European Commission grant MRTN-CT-2004-504799 and the Consolider-Ingenio 2010 Project “Consolidating Economics” of the Spanish Ministry of Science and Innovation.


We develop a model of a firm whose production process requires it to initiate and nurture a relationship with its stakeholders. Because there are spillover benefits of 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. Transparency costs 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 undertake noncontractible 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.