The role of information for international capital flows: new evidence from the SDDS

In this paper, the authors investigate whether better information about the macroeconomic environment of an economy has a positive impact on its capital inflows, namely portfolio and foreign direct investment (FDI). The purpose of the study is to explicitly quantify information asymmetries by compliance with the IMF's Special Data Dissemination Standard (SDDS). The authors find that compliance with the SDDS increased FDI inflows by an economically relevant magnitude of 56 % while there are no such aggregate effects for portfolio flows. The empirical strategy demonstrates that the effect runs from SDDS to FDI and not vice versa, introduces a test for endogeneity bias due to omitted variables, and tests for spatial correlation in the residuals.