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.
机构:
Financial Markets Dept Bank Canada, Ottawa, ON K1A 0G9, CanadaUniv Rochester, William E Simon Grad Sch Business Adm, Rochester, NY 14627 USA
Bauer, Gregory H.
Vega, Clara
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机构:
Univ Rochester, William E Simon Grad Sch Business Adm, Rochester, NY 14627 USAUniv Rochester, William E Simon Grad Sch Business Adm, Rochester, NY 14627 USA