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Market transparency and international allocation of capital

Author

Listed:
  • Udo Broll

    (Technische Universität Dresden)

  • Bernhard Eckwert

    (Bielefeld University)

  • Keith K. P. Wong

    (The University of Hong Kong)

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 .

Suggested Citation

  • Udo Broll & Bernhard Eckwert & Keith K. P. Wong, 2019. "Market transparency and international allocation of capital," Asia-Pacific Journal of Regional Science, Springer, vol. 3(2), pages 421-429, June.
    • Handle: RePEc:spr:apjors:v:3:y:2019:i:2:d:10.1007_s41685-018-0101-5
    DOI: 10.1007/s41685-018-0101-5
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    References listed on IDEAS

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    More about this item

    Keywords

    International capital allocation; Country risk; Public information; Transparency;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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