Working Paper: NBER ID: w7736
Authors: Assaf Razin; Efraim Sadka; Chiwa Yuen
Abstract: In the presence of asymmetric information, the stage at which financing decisions are made about investment projects in a small open economy is crucial for the composition of international capital inflows as well as for the efficiency of channeling savings into investment. This paper compares the implications of two extreme cases regarding the information possessed by the firms at their financing stage for whether inflows of foreign debt may crowd out foreign equity or the other way round. The scope for corrective tax policies is examined. We also provide a welfare comparison between the two mechanisms of capital flows.
Keywords: debt flows; equity flows; asymmetric information; capital markets
JEL Codes: D82; F21; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment decisions (G11) | Foreign debt flows (F32) |
| Investment decisions (G11) | Foreign equity flows (F21) |
| Foreign debt flows (F32) | Crowding out of foreign equity flows (F21) |
| Information asymmetry (D82) | Investment and financing decisions (G31) |
| Presence of loan market (G21) | Mitigation of crowding out effect in equity markets (E44) |