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Explaining the Trend and the Diversity in the Evolution of the Stock Market

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Author Info
Niloy Bose
Rebecca Neumann ()

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Abstract

In an overlapping generations economy, lenders fund risky investment projects of firms by drawing up loan contracts in the presence of an informational asymmetry. An optimal contract entails the issue of only debt, only equity, or a mix of the two. The equilibrium choice of contract depends on the state of the economy, which in turn depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development. The paper is able to explain both the endogenous emergence of the stock market along the path of economic development and the diversity in the mode of financing that is commonly observed in the intermediate stage of development.

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Publisher Info
Paper provided by Center for European, Governance and Economic Development Research, University of Goettingen (Germany). in its series Center for European, Governance and Economic Development Research (cege) Discussion Papers with number 47.

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Length: 27
Date of creation: 11 Jul 2005
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Handle: RePEc:got:cegedp:47

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
G00 - Financial Economics - - General - - - General
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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References listed on IDEAS
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  1. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April. [Downloadable!] (restricted)
  2. Bose, Niloy & Cothren, Richard, 1996. "Equilibrium loan contracts and endogenous growth in the presence of asymmetric information," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 363-376, October. [Downloadable!] (restricted)
  3. Xavier Freixas & Patrick Bolton, 1998. "A Dilution Cost Approach to Financial Intermediation and Securities Markets," FMG Discussion Papers dp305, Financial Markets Group. [Downloadable!] (restricted)
  4. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August. [Downloadable!] (restricted)
  5. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April. [Downloadable!] (restricted)
  6. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September. [Downloadable!] (restricted)
  7. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  8. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2001. "Does Financial Liberalization Spur Growth?," NBER Working Papers 8245, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Azariadis, C. & Smith, B.D., 1989. "Adverse Selection In The Overlapping Generations Model," RCER Working Papers 202, University of Rochester - Center for Economic Research (RCER).
  11. Bencivenga, Valerie R. & Smith, Bruce D., 1993. "Some consequences of credit rationing in an endogenous growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 97-122. [Downloadable!] (restricted)
    Other versions:
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