Do Debt Flows Crowd out Equity Flows or the Other Way Round?
In the presence of asymmetric information, the stage at which investment-financing decisions are made is crucial for the composition of international capital flows as well as for the efficiency of channeling savings into investment. This paper compares the implications of two extreme assumptions regarding the information possessed by the firms at their financing stage for thether foreign debt inflows may crowd out foreign equity flows or the other way round. The scope for corrective tax policy is examined. A welfare comparison between the two mechanisms of capital flows is provided.
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