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Finance and development: Rethinking the role of financial transparency

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  • Uras, Burak R.

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.

Suggested Citation

  • Uras, Burak R., 2020. "Finance and development: Rethinking the role of financial transparency," Journal of Banking & Finance, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:jbfina:v:111:y:2020:i:c:s0378426619302948
    DOI: 10.1016/j.jbankfin.2019.105721
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    More about this item

    Keywords

    Financial development; Transparency; Adverse selection; Under-investment;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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