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Finance and development: Rethinking the role of financial transparency

Burak R. Uras

Journal of Banking & Finance, 2020, vol. 111, issue C

Abstract: Over the last decade many developing countries strengthened their transparency standards with the objective of improving asset market allocations and macroeconomic outcomes. This paper develops a general equilibrium model and argues that in a financially underdeveloped economy - with uninsurable consumption risk and stochastic-investment - enforcing financial transparency might be counterproductive. The framework builds upon a standard property that illiquid asset markets cause under-investment in assets that pay in the long-run, because individually rational agents hoard cash to exploit sales of underpriced long-term assets. First, I show that in this environment private revelation of news about investment-returns could give a chance to sell low-quality assets and then characterize the conditions under which the lack of financial transparency reduces under-investment and improves macroeconomic development. An empirical analysis reveals that the theoretical predictions of the model is in line with cross-country data.

Keywords: Financial development; Transparency; Adverse selection; Under-investment (search for similar items in EconPapers)
JEL-codes: E44 G2 O16 O47 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:111:y:2020:i:c:s0378426619302948

DOI: 10.1016/j.jbankfin.2019.105721

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