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Discretionary freedom of choice and risk in alternative capital markets

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  • Krzysztof Waśniewski

Abstract

The present paper studies the influence of one particular aspect of institutions, namely economic agents’ discretionary freedom of choice given by legal rules, upon the risk incurred in alternative capital markets, in the lines of the old institutional school of economics. A game-theoretic model is introduced, presenting the alternative capital markets as Harsanyi’s games with imperfect information, succeeding to each other in a Selten’s extensive game with imperfect recall. Market participants’ behaviour is made of strategies oriented on cash flows and indirect benefits, through the usage of discretionary freedom of choice offered by the applicable law. The overall level of risk in the market depends on whether these strategies reach, collectively, a state of Nash’s dynamic equilibrium, or not. The institution of nominated advisers, in two alternative capital markets, namely the British AIM and the Polish New Connect, is studied on the grounds of the model. The main finding is that, although the regulations of both markets create significant risk through the discretionary freedom of choice that the operators of these markets attribute to themselves, in terms of social games the markets seem to be quite stable. In conclusion, numerous hypotheses for further research are formulated, in particular that alternative capital markets are still institutionally young and experimental. Copyright Springer Science+Business Media, LLC 2015

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  • Krzysztof Waśniewski, 2015. "Discretionary freedom of choice and risk in alternative capital markets," European Journal of Law and Economics, Springer, vol. 39(3), pages 573-605, June.
    • Handle: RePEc:kap:ejlwec:v:39:y:2015:i:3:p:573-605
    DOI: 10.1007/s10657-012-9316-5
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    More about this item

    Keywords

    Institutions; Old institutional school; Alternative capital markets; C70; D72; D81; G10; G3; K00;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G3 - Financial Economics - - Corporate Finance and Governance
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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