The effects of information voids on capital flows in emerging markets

Information voids reflect a lack of publicly available information about a country’s investment climate, and represent the information problems associated with institutional voids. We argue that foreign investors differ in their sensitivity to information voids based on their own private information and their flexibility in responding rapidly to change. We predict that foreign banks will be least hampered by information voids, due to their privileged access to private information about local conditions and ability to adapt quickly to new information. Portfolio investors, while impeded by information voids due to their severely limited access to local private information, are able to quickly respond to new information. Foreign direct investors have moderate access to local private information, yet their inability to adapt quickly creates problems dealing with information voids. Using time-series cross-sectional data on local public information and capital flows to the thirty largest emerging markets from 1994 to 2012, we find preliminary support for our hypotheses regarding the sensitivity of different investors to information voids. We find that direct investors are most sensitive to information voids and banks are least sensitive, while portfolio investors are moderately sensitive.