Risk versus ambiguity and international security design

Brian Hill () and Tomasz Michalski
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Brian Hill: HEC Paris - Recherche - Hors Laboratoire - HEC Paris - Ecole des Hautes Etudes Commerciales, CNRS - Centre National de la Recherche Scientifique, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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Abstract: We study portfolio allocation and characterize contracts issued by firms in the international financial market when investors exhibit ambiguity aversion and perceive ambiguity in assets issued in foreign locations. Increases in the variance of their risky production process cause firms to issue assets with a higher variable payment (equity). Hikes in investors' perceived ambiguity have the opposite effect, and lead to less risk-sharing. Entrepreneurs from capital-scarce countries finance themselves relatively more through debt than equity. They are thus exposed to higher volatility per unit of consumption. The expected returns on capital invested in capital-scarce countries may also be lower. Such results do not hold in the absence of ambiguity, that is, when investors only perceive risk. New facts uncovered from cross-country firm-level data are consistent with our model.

Date: 2018-07
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Published in Journal of International Economics, 2018, 113, pp.74-105

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Related works:
Journal Article: Risk versus ambiguity and international security design (2018)
Working Paper: Risk versus Ambiguity and International Security Design (2014)
Working Paper: Risk Versus Ambiguity and International Security Design (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01966706

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