Information Disclosure Costs and the Choice of Financing Source

Abstract

Small- and medium-size, high quality, entrepreneurial firms may prefer bilateral to multilateral financing arrangements, in order to avoid disclosure of private information which might leak to competitors. In the presence of a cost differential between these forms of financing, the higher quality firms (those with more to lose from disclosure) prefer bilateral financing. The cost differential prevents competitors from unambiguously inferring that these firms are hiding information. Journal of Economic Literature Classification Numbers: D82, G21, G32, K22.