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International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing

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  • Rebecca Neumann

Abstract

The impact of increased equity trade on a small open economy is examined. Stochastic second-period output depends on first-period investment. Owing to information asymmetries, domestic agents cannot reveal credibly the level of first-period investment to international financiers. Consistent with recent proposals to strengthen the international financial system, domestic firms choose to incur self-monitoring costs to increase capital inflows. As an alternative to borrowing, domestic agents may sell ownership claims to second-period output. When equity claims convey information, equity trade is preferred to international borrowing, consistent with developing economies' observed reliance on international equity relative to debt in recent years.

Suggested Citation

  • Rebecca Neumann, 2003. "International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 674-700, August.
  • Handle: RePEc:cje:issued:v:36:y:2003:i:3:p:674-700
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Neumann, Rebecca M., 2006. "The effects of capital controls on international capital flows in the presence of asymmetric information," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 1010-1027, October.
    2. Anyangah, Joshua Okeyo, 2010. "Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 456-475, August.
    3. Morrissey, Oliver & Udomkerdmongkol, Manop, 2012. "Governance, Private Investment and Foreign Direct Investment in Developing Countries," World Development, Elsevier, vol. 40(3), pages 437-445.
    4. Buch, Claudia M., 2002. "Business Cycle Volatility and Globalization: A Survey," Kiel Working Papers 1107, Kiel Institute for the World Economy (IfW).
    5. Keskinsoy, Bilal, 2017. "Taxi, Takeoff and Landing: Behavioural Patterns of Capital Flows to Emerging Markets," MPRA Paper 78129, University Library of Munich, Germany.
    6. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, vol. 74(1), pages 94-119, January.
    7. Chander KANT, "undated". "Relationship between Different Types of Private Capital Flows to Developing Countries," EcoMod2008 23800056, EcoMod.
    8. Mary Kathryn Campion & Rebecca M. Neumann, 2003. "Compositional Effects of Capital Controls - Theory and Evidence," The World Economy, Wiley Blackwell, vol. 26(7), pages 957-973, July.
    9. Holger Görg & Oliver Morrissey & Manop Udomkerdmongkol, "undated". "Investment and Sources of Investment Finance in Developing Countries," Discussion Papers 07/16, University of Nottingham, GEP.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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