ENDOGENOUS INFORMATION FRICTIONS, STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH

Salvatore Capasso

Manchester School, 2008, vol. 76, issue 2, pages 204-222

Abstract: The aim of this paper is to provide further insights into the linkages between stock market development and economic growth. Under information asymmetries, higher return projects tend to be penalized since these projects are valued at the average, and lower than fair, price. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firms-typically, equity or debt. Growth occurring, informational costs decrease and so does the cost of equity relative to debt financing which spurs the development of stock markets. Copyright © 2008 The Author.

Date: 2008

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