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Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument

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  • Siddiqi, Hammad

Abstract

Information flows are necessary for well-functioning financial markets. However, in many emerging markets, the legal and institutional preconditions for proper information flow are not met. How do such markets respond? We argue that they respond by developing innovative information transmission mechanisms. We identify one such mechanism associated with the evolution of equity markets in South Asia. The mechanism operates through a financing instrument unique to India and Pakistan, called badla in local parlance. We develop a signaling model in which a broker-financier signals his private information to investors by choosing various levels of financing to provide in the badla market for stocks. A fully separating equilibrium exists allowing full discrimination of various types of stocks. Hence, information transmission takes place through this channel.

Suggested Citation

  • Siddiqi, Hammad, 2008. "Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument," MPRA Paper 6714, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6714
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    References listed on IDEAS

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    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    3. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    6. Berkman, Henk & Eleswarapu, Venkat R., 1998. "Short-term traders and liquidity: a test using Bombay Stock Exchange data," Journal of Financial Economics, Elsevier, vol. 47(3), pages 339-355, March.
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    Cited by:

    1. Qazi Muhammad Adnan Hye & Shahida Wizarat, 2011. "Impact of financial liberalization on agricultural growth: a case study of Pakistan," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 3(2), pages 191-209, May.
    2. Javed Iqbal, 2012. "Stock Market in Pakistan," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(1), pages 61-91, April.
    3. Iqbal, Javed, 2008. "Stock Market in Pakistan: An Overview," MPRA Paper 11868, University Library of Munich, Germany.

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    More about this item

    Keywords

    Signaling; Information Transmission; Separating Equilibrium; Badla-Financing; Emerging Markets;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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