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Do Debt Flows Crowd Out Equity Flows or the Other Way Round?

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  • Assaf Razin

    (Eitan Berglas School of Economics, Tel Aviv University)

  • Efraim Sadka

    (Eitan Berglas School of Economics, Tel Aviv University)

  • Chi-Wa Yuen

    (School of Economics and Finance, University of Hong Kong)

Abstract

In the presence of asymmetric information, the stage at which financing decisions are made about investment projects in a small open economy is crucial for the composition of international capital inflows as well as for the efficiency of channeling savings into investment. This paper compares the implications of two extreme cases regarding the information possessed by the firms at their financing stage for whether inflows of foreign debt may crowd out foreign equity or the other way round. The scope for corrective tax policies is examined. We also provide a welfare comparison between the two mechanisms of capital flows.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 1 (2000)
Issue (Month): 1 (May)
Pages: 33-47

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Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:33-47

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Keywords: Debt and equity flows; Asymmetric information; Bankruptcy cost; Market failures; Corrective taxation;

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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  2. Roger H. Gordon & A. Lans Bovenberg, 1994. "Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," NBER Working Papers 4796, National Bureau of Economic Research, Inc.
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  4. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1998. "A pecking order of capital inflows and international tax principles," Journal of International Economics, Elsevier, Elsevier, vol. 44(1), pages 45-68, February.
  5. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
  8. Tesar, Linda L & Werner, Ingrid M, 1995. "U.S. Equity Investment in Emerging Stock Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(1), pages 109-29, January.
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Cited by:
  1. Mahvash S. Qureshi & Jonathan D. Ostry & Atish R. Ghosh & Marcos Chamon, 2011. "Managing Capital Inflows: The Role of Capital Controls and Prudential Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  2. Ostry, Jonathan D. & Ghosh, Atish R. & Chamon, Marcos & Qureshi, Mahvash S., 2012. "Tools for managing financial-stability risks from capital inflows," Journal of International Economics, Elsevier, Elsevier, vol. 88(2), pages 407-421.
  3. Buch, Claudia M. & Heinrich, Ralph P. & Schertler, Andrea, 2003. "External and Internal Financial Structures in Europe: A Corporate Finance Perspective," EIFC - Technology and Finance Working Papers, United Nations University, Institute for New Technologies 19, United Nations University, Institute for New Technologies.

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