Advanced Search
MyIDEAS: Login to save this paper or follow this series

Favouritism or Markets in Capital Allocation?

Contents:

Author Info

  • Giannetti, Mariassunta
  • Yu, Xiaoyun

Abstract

Casual observation suggests that capital allocation is often driven by favouritism and connections rather than by market mechanisms and information on future expected returns. We investigate when favouritism or markets emerge as an equilibrium outcome in the allocation of capital. We show that when information is unreliable and costly, financiers do not have incentives to investigate distant investment opportunities and allocate capital to entrepreneurs they are familiar with (favouritism). If the pool of saving is relatively small, favouritism can lead to an efficient allocation of investment. As the economy develops and its pool of saving increases, information production and the identification of distant investment opportunities (markets) become crucial for efficient investment decisions. Nevertheless, favouritism may emerge in equilibrium and investors may find it optimal to fund low quality entrepreneurs if they are familiar with them. Since competition for capital is low in an equilibrium with favouritism, entrepreneurs enjoy high rents. Thus, even high quality entrepreneurs may have no incentive to join markets with standards that foster information acquisition, but rather run inefficiently small firms.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP6124.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6124.

as in new window
Length:
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:cpr:ceprdp:6124

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: competition for capital; exchange competition; finance and growth; information production;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 413-444, March.
  2. Maciej Firla-Cuchra & Tim Jenkinson, 2005. "Why Are Securitization Issues Tranched?," Economics Series Working Papers 2005-FE-04, University of Oxford, Department of Economics.
  3. Randall Morck & Bernard Yeung & Wayne Yu, 1999. "The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?," Harvard Institute of Economic Research Working Papers 1879, Harvard - Institute of Economic Research.
  4. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  5. Ross Levine & Sergio L. Schmukler, 2006. "Internationalization and Stock Market Liquidity," Review of Finance, European Finance Association, vol. 10(1), pages 153-187.
  6. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
  7. Christian Leuz & Karl V. Lins & Francis E. Warnock, 2010. "Do Foreigners Invest Less in Poorly Governed Firms?," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 3245-3285, March.
  8. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  9. Ljungqvist, Alexander P & Wilhelm Jr, William J, 2001. "IPO Allocations: Discriminatory or Discretionary?," CEPR Discussion Papers 2855, C.E.P.R. Discussion Papers.
  10. Rafael La Porta & Florencio López-de-Silanes & Guillermo Zamarripa, 2003. "Related Lending," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 231-268, February.
  11. Bushee, Brian J. & Leuz, Christian, 2005. "Economic consequences of SEC disclosure regulation: evidence from the OTC bulletin board," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 233-264, June.
  12. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc.
  13. Benveniste, Lawrence M & Ljungqvist, Alexander P & Wilhelm Jr, William J & Yu, Xiaoyun, 2001. "Evidence of Information Spillovers in the Production of Investment Banking Services," CEPR Discussion Papers 2988, C.E.P.R. Discussion Papers.
  14. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, vol. 59(1), pages 65-105, 02.
  15. Marco Pagano & Ailsa A. Roell & Joseph Zechner, 1999. "The Geography of Equity Listing; Why Do Companies List Abroad?," CSEF Working Papers 28, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Sep 2001.
  16. Boot, Arnoud W A & Thakor, Anjan, 1995. "Financial System Architecture," CEPR Discussion Papers 1197, C.E.P.R. Discussion Papers.
  17. Michelle Lowry & G. William Schwert, 2000. "IPO Market Cycles: Bubbles or Sequential Learning?," NBER Working Papers 7935, National Bureau of Economic Research, Inc.
  18. Bhattacharya, Utpal & Ravikumar, B, 2001. "Capital Markets and the Evolution of Family Businesses," The Journal of Business, University of Chicago Press, vol. 74(2), pages 187-219, April.
  19. Fishman, Michael J & Hagerty, Kathleen M, 1989. " Disclosure Decisions by Firms and the Competition for Price Efficienc y," Journal of Finance, American Finance Association, vol. 44(3), pages 633-46, July.
  20. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
  21. Marco Pagano & Fabio Panetta & Luigi Zingales, . "Why Do Companies Go Public? An Empirical Analysis," CRSP working papers 330, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  22. repec:kap:eurfin:v:10:y:2006:i:1:p:153-187 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Hermalin, Benjamin E. & Weisbach, Michael S., 2010. "Information Disclosure and Corporate Governance," SIFR Research Report Series 76, Institute for Financial Research, revised 01 Jun 2011.
  2. Axelson, Ulf & Baliga, Sandeep, 2007. "Liquidity and Manipulation of Executive Compensation Schemes," SIFR Research Report Series 54, Institute for Financial Research.
  3. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2011. "Financial Openness and Productivity," World Development, Elsevier, vol. 39(1), pages 1-19, January.
  4. Rydqvist, Kristian, 2010. "Tax Arbitrage with Risk and Effort Aversion - Swedish Lottery Bonds 1970-1990," SIFR Research Report Series 70, Institute for Financial Research.
  5. Fedyk, Yuriy & Walden, Johan, 2007. "High-Speed Natural Selection in Financial Markets with Large State Spaces," SIFR Research Report Series 52, Institute for Financial Research.
  6. Dreber, Anna & Rand, David G. & Garcia, Justin R. & Wernerfelt, Nils & Lum, J. Koji & Zeckhauser, Richard, 2010. "Dopamine and Risk Preferences in Different Domains," SIFR Research Report Series 71, Institute for Financial Research.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:6124. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.