Firms' Stakeholders and the Costs of Transparency

Abstract

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.

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