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Capital Flows with Debt-And Equity-Financed Invesment: Equilibrium Structure and Efficiency Implications

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  • Assaf Razin
  • Efraim Sadka
  • Chi-Wa Yuen

Abstract

This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little. An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.

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Bibliographic Info

Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 136.

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Date of creation: Aug 1998
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Handle: RePEc:cem:doctra:136

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  1. 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.
  2. 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.
  3. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  4. Razin, A. & Sadka, E. & Yuen, C.W., 1997. "Chanelling Domestic Saving into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment," Papers 36-97, Tel Aviv.
  5. 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.
  6. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  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. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  9. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  10. Lane, Philip R, 1999. "North-South Lending with Moral Hazard and Repudiation Risk," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 50-58, February.
  11. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1997. "Channeling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment," NBER Working Papers 6338, National Bureau of Economic Research, Inc.
  12. Zhaohui Chen & Mohsin S. Khan, 1997. "Patterns of Capital Flows to Emerging Markets," IMF Working Papers 97/13, International Monetary Fund.
  13. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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Cited by:
  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers.
  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.
  3. Madiha Bashir & Attiya Yasmin Javid, 2014. "Financial Flows, External Capital Structure, Institutions and Economic Growth in Asian Developing Economies," PIDE-Working Papers 2014:108, Pakistan Institute of Development Economics.

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