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

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Author Info

  • 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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Related research

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

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References

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
  3. Razin, A & Sadka, E & Yuen, C-W, 1997. "A Pecking Order of Capital Inflows and International Tax Principles," Papers 12-97, Tel Aviv - the Sackler Institute of Economic Studies.
  4. Gordon, R.H. & Bovenberg, A.L., 1994. "Why Is Capital So Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," Working Papers 358, Research Seminar in International Economics, University of Michigan.
  5. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Tesar, Linda L & Werner, Ingrid M, 1995. "U.S. Equity Investment in Emerging Stock Markets," World Bank Economic Review, 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 Working Papers 17363, National Bureau of Economic Research, Inc.
  2. 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 19, United Nations University, Institute for New Technologies.

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