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).
*Published: This paper was subsequently published as Firms' Stakeholders and the Costs of Transparency, Andres Almazan, Javier Suarez, Sheridan Titman, in NBER book Entrepreneurship: Strategy and Structure (2007)
Andres Almazan & Javier Suarez & Sheridan Titman, 2009.
"Firms' Stakeholders and the Costs of Transparency,"
Journal of Economics & Management Strategy,
Blackwell Publishing, vol. 18(3), pages 871-900, 09.
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