Market transparency and international allocation of capital

Udo Broll (), Bernhard Eckwert and Keith K. P. Wong
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Udo Broll: Technische Universität Dresden
Bernhard Eckwert: Bielefeld University
Keith K. P. Wong: The University of Hong Kong

Asia-Pacific Journal of Regional Science, 2019, vol. 3, issue 2, No 6, 429 pages

Abstract: Abstract The paper analyzes the interaction between the domestic and foreign capital allocation of a multinational firm, and market transparency in the foreign country. Foreign capital investment is risky because of uncertainties about the host country’s institutions and market conditions. We model transparency through a publicly observable signal that provides information about the quality of institutions and market conditions in the foreign country. Under higher transparency, the public signal conveys more precise information. It is shown that higher transparency leads to more dispersion of conditionally expected foreign country risks as they become more sensitive to the realization of the public signal. We characterize conditions under which more transparency encourages or discourages foreign investment. Regardless of the volume of capital flows, the ex-ante expected total cash flow of the firm always increases with more transparency .

Keywords: International capital allocation; Country risk; Public information; Transparency (search for similar items in EconPapers)
JEL-codes: D21 D81 R12 R50 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s41685-018-0101-5

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