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International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing

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  • Rebecca Neumann

Abstract

The impact of increased equity trade on a small open economy is examined. Stochastic second-period output depends on first-period investment. Owing to information asymmetries, domestic agents cannot reveal credibly the level of first-period investment to international financiers. Consistent with recent proposals to strengthen the international financial system, domestic firms choose to incur self-monitoring costs to increase capital inflows. As an alternative to borrowing, domestic agents may sell ownership claims to second-period output. When equity claims convey information, equity trade is preferred to international borrowing, consistent with developing economies' observed reliance on international equity relative to debt in recent years.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 36 (2003)
Issue (Month): 3 (August)
Pages: 674-700

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Handle: RePEc:cje:issued:v:36:y:2003:i:3:p:674-700

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References

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  1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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  15. Rebecca Neumann, 2003. "International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 36(3), pages 674-700, August.
  16. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, Elsevier, vol. 1(4), pages 337-352, December.
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  18. Campion, Mary Kathryn & Neumann, Rebecca M., 2004. "Compositional effects of capital controls: evidence from Latin America," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 15(2), pages 161-178, August.
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Citations

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Cited by:
  1. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, Elsevier, vol. 74(1), pages 94-119, January.
  2. Neumann, Rebecca M., 2006. "The effects of capital controls on international capital flows in the presence of asymmetric information," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(6), pages 1010-1027, October.
  3. Anyangah, Joshua Okeyo, 2010. "Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance," Resource and Energy Economics, Elsevier, Elsevier, vol. 32(3), pages 456-475, August.
  4. Claudia M. Buch, 2002. "Business Cycle Volatility and Globalization: A Survey," Kiel Working Papers 1107, Kiel Institute for the World Economy.
  5. Morrissey, Oliver & Udomkerdmongkol, Manop, 2012. "Governance, Private Investment and Foreign Direct Investment in Developing Countries," World Development, Elsevier, Elsevier, vol. 40(3), pages 437-445.
  6. Rebecca Neumann, 2003. "International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 36(3), pages 674-700, August.

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