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Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications

Author

Listed:
  • Assaf Razin
  • Chi-Wa Yuen
  • Efraim Sadka

Abstract

This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little. An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.

Suggested Citation

  • Assaf Razin & Chi-Wa Yuen & Efraim Sadka, 1998. "Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications," IMF Working Papers 1998/159, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/159
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    Cited by:

    1. Mr. Philip R. Lane & Mr. Gian M Milesi-Ferretti, 2000. "External Capital Structure: Theory and Evidence," IMF Working Papers 2000/152, International Monetary Fund.
    2. Inder Sekhar Yadav & Debasis Pahi & Rajesh Gangakhedkar, 2019. "Financial Markets Development and Financing Choice of Firms: New Evidence from Asia," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(4), pages 429-451, December.
    3. Madiha Bashir & Attiya Yasmin Javid, 2014. "Financial Flows, External Capital Structure, Institutions and Economic Growth in Asian Developing Economies," PIDE-Working Papers 2014:108, Pakistan Institute of Development Economics.
    4. Zubair HASAN, 2018. "Debt, equity, universal banking and Islamic finance: A note," Journal of Economic and Social Thought, EconSciences Journals, vol. 5(2), pages 179-183, June.
    5. Al-Jarhi, Mabid, 2016. "An economic theory of Islamic finance," MPRA Paper 72698, University Library of Munich, Germany.

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