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

Author

Listed:
  • 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.

Suggested Citation

  • Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "Do Debt Flows Crowd Out Equity Flows or the Other Way Round?," CEMA Working Papers 3, China Economics and Management Academy, Central University of Finance and Economics, revised Apr 2000.
    • Handle: RePEc:cuf:wpaper:3
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    References listed on IDEAS

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    1. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1998. "A pecking order of capital inflows and international tax principles," Journal of International Economics, Elsevier, vol. 44(1), pages 45-68, February.
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    7. Razin,Assaf & Sadka,Efraim (ed.), 1999. "The Economics of Globalization," Cambridge Books, Cambridge University Press, number 9780521622684.
    8. Huberman, Gur, 2001. "Familiarity Breeds Investment," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-680.
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    Cited by:

    1. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, December.
    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, vol. 88(2), pages 407-421.
    3. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
    4. Gaowang Wang & Heng-fu Zou, 2012. "Economic Globalization, Mercantilism and Economic Growth," CEMA Working Papers 548, China Economics and Management Academy, Central University of Finance and Economics.
    5. 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.

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    More about this item

    Keywords

    Debt and equity flows; Asymmetric information; Bankruptcy cost; Market failures; Corrective taxation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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