Imperfect competition in financial markets and capital structure

We consider a model of corporate finance with imperfectly competitive financial intermediaries. Firms can finance projects either via debt or via equity. Because of asymmetric information about firms’ growth opportunities, equity financing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever financial intermediaries have sufficient market power. In the latter case, best firms issue debt while the less profitable firms are equity-financed. We also show that strategic interaction between oligopolistic intermediaries results in multiple equilibria. If one intermediary chooses to buy more debt, the price of debt decreases, so the best equity-issuing firms switch from equity to debt financing. This in turn decreases average quality of equity-financed pool, so other intermediaries also shift towards more debt.     

Pareto improving financial innovation in incomplete markets

Summary. In this paper we develop a differential technique for investigating the welfare effects of financial innovation in incomplete markets. Utilizing this technique, and after parametrizing the standard competitive, pure-exchange economy by both endowments and utility functions, we establish the following (weakly) generic property: Let S be the number of states, I be the number of assets and H be the number of households, and consider a particular financial equilibrium. Then, provided that the degree of market incompleteness is sufficiently larger than the extent of household heterogeneity, S−I≥2H−1 [resp. S−I≥H+1], there is an open set of single assets [resp. pairs of assets] whose introduction can make every household better off (and, symmetrically, an open set of single assets [resp. pairs of assets] whose introduction can make them all worse off ). We also devise a very simple nonparametric procedure for reducing extensive household heterogeneity to manageable size, a procedure which not only makes our restrictions on market incompleteness more palatable, but could also prove to be quite useful in other applications involving smooth analysis. Received: August 14, 1995; revised version: April 14, 1997     

论我国资本市场的金融抑制和金融深化

自上世纪90年代开始,我国资本市场的发展已形成了初步的规模,但到目前为止依然存在着结构不合理,政策性因素明显的问题。资本市场的发展是分化金融风险的需要,是国有企业改革的需要,是国家宏观调控和产业结构升级的需要。但在发展中必须把握系统原则、渐进原则、开放原则和创新原则。     

当前国际金融市场的问题和发展趋势

20世纪90年代以来,全球金融领域发生了许多基于金融技术的革命性变革所引起的深刻变化。这种金融技术的革命性变革是知识经济迅猛发展的结果,也是知识经济最激动人心的部分。相应地,世界金融进入了新金融时代,这主要表现在以下五个方面。     

A model for international capital markets closure in an economy with incomplete markets and short sales

Using a two-country dynamic optimization model, we investigate the impact of exchange risk, incomplete information and short sales constraints on international portfolio decisions around market closure. Using optimal control theory, we provide solutions and simulation results. Our model can be applied to solve several problems in financial economics in the presence of market closure, information asymmetry and short sales constraints.     

Innovation,growth and financial markets

We review some of the literature at the intersection of innovation, financial markets, and economic growth. We explore two key questions: (i) How financial markets interact with innovation; (ii) what type of quality transformations are brought about by innovation. A special emphasis is given to questions that stem from the 2008 economic and financial crisis, and to subjects further developed in the articles collected in this issue.     

Discrimination among alternative models of international capital markets

Most empirical capital flow studies have estimated individual models, many by assuming exogenous interest rates. None of these studies has examined interest rate interdependence from the perspective of the models. In this study, a simultaneous equation model of capital flows containing previous models as special cases is estimated using the cross spectral technique of model discrimination. Based on examination of both the flow-differential link and interest rate interdependence resulting from capital flows, the evidence 1) supports a simultaneous equation stock adjustment model, and 2) suggests that interest rate endogeneity may not imply serious simultaneous equation bias for those previous studies which assume exogenous interest rates.     

LDC participation in international financial markets: Debt and reserves

This paper analyzes LDC borrowing and reserve-holding behavior as part of a general equilibrium portfolio problem. Estimates of LDC debt and reserve demand and credit supply suggest that debt, along with reserves, serves a transactions role. Another finding is that most LDC borrowers are credit constrained. An analysis of LDC export behavior suggests that defaults are likely to be independent, uncorrelated phenomena.     

How international financial flows affect stock markets?

Relying on the IMF Coordinated Portfolio Investment Survey, which reports countries’ bilateral investments in financial assets at end-2001 to end-2015, this article shows that a country’s stock market growth is not only spatially correlated with those of nearby countries, but also positively associated with the magnitude of connectedness of the country’s international investments in debt within a dynamic financial investment flow network. The positive relation arises because debts have become an increasingly important source of capital for developing countries.     

Endogenous growth cycles with financial intermediaries and entrepreneurial innovation

This study analyzes the effects of financial intermediaries’ activities on economic fluctuations in a model of endogenous innovation cycles. In the model, I consider an economy in which entrepreneurs and financial intermediaries engage in their respective innovative activities. Entrepreneurs can invent new products and raise funds for their invention from financial intermediaries and if their invention is successful, they can produce new products. Only financial intermediaries can evaluate entrepreneurial ideas regarding their new products. Moreover, they can invest their capital to improve information about the entrepreneurial ideas and thus, meet successful entrepreneurs with a higher probability. I show that when an economy does not accumulate enough capital, and the level of financial innovation is not sufficiently high, the economy is trapped in a no-entrepreneurial innovation regime. I also show that when the financial innovation slightly develops, the economy fluctuates between the no-entrepreneurial innovation and entrepreneurial innovation regimes.     

Policy uncertainty and international financial markets: the case of Brexit

ABSTRACT

This study assesses the impact of the Brexit probability on both the UK and on international financial markets, for the first and the second statistical moments. As financial markets are by nature highly interlinked, one might expect that the uncertainty engendered by Brexit also has an impact on financial markets in several other countries. We first estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to uncertainty about Brexit and UK financial market volatilities. Second, we use two other measures of the perceived probability of Brexit before the referendum, namely daily data released by Betfair and results of polls published by Bloomberg. Based on these data sets, and using both panel and single-country SUR estimation methods, we analyse the Brexit effect on levels of stock returns, sovereign CDS, 10-year interest rates in 19 predominantly European countries, and those of the British pound and the euro. We show that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries. The main losers outside the UK are the ‘GIIPS’ economies: Greece, Ireland, Italy, Portugal and Spain.     

Micro and macroeconomic effects of financial innovation in a domestic and international perspective

This paper is focused on the rise and the fall of structured finance, derivatives, and asset-backed securities. Special focus is made on the attempts of the banking sector to improve the economic performance, particularly the ROE, by creating, acquiring, and selling derivatives. The possible outcome of public intervention to rescue the financial sector is finally discussed. V. Coppola supported the research in collecting and elaborating data.     

Proof of global stability,transitional dynamics,and international capital flows in a two-country model of innovation and growth

Global stability properties of dynamic two-country models can be easily studied in the case of perfect international capital flows. With internationally constant relative productivities, balanced-growth path values for factor prices will hold on any path leading to the balanced-growth path unless one country experiences a period of no innovation. Innovation rates converge in the case of perfect international knowledge spillovers but long-run consumption levels and trade patterns are path-dependent. GDP per capita is predicted to converge slowly despite the presence of perfect international capital markets and no explicit inclusion of adjustment costs. The trade balance of the rich country is initially positive but after some time turns into a deficit.     

When do thick venture capital markets foster innovation? An evolutionary analysis

In this paper, we examine the trade off between different effects of the availability of venture capital on the speed of technological progress in an industry. We consider an evolutionary industry simulation model based on Nelson and Winter (1982), in which R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to found a spinoff of the incumbent. Venture capital is needed to finance a spinoff, so that the expected profits from founding a spinoff depend on how easily venture capital can be acquired. Accordingly, thick venture capital markets might have two opposing effects. First, incentives of firms to invest in R&D might be reduced and, second, if spinoff formation results in technological spillovers between the parent firm and the spinoffs, the generation of spinoff firms might positively influence the future efficiency of the incumbent’s innovation efforts. We study the manner in which this tradeoff influences the effect of venture capital on innovation expenditures, speed of technological change and evolution of industry concentration in several scenarios with different industry characteristics.     

Corporate environmental disclosure, financial markets and the media: An international perspective

In this study, we analyze the information dynamics between corporate environmental disclosure, financial markets (as proxied by financial analysts' earnings forecasts) and public pressures (as proxied by a firm's media exposure). We adopt a comprehensive view of disclosure that encompasses environmental information that is both print-based as well as web-based. The sample comprises firms from both continental Europe (Belgium, France, Germany, and Netherlands) as well as North America (Canada and the United States). Relying on a system of equations that controls for endogeneity between environmental disclosure determination and financial analysts' work, we show that enhanced environmental disclosure translates into more precise earnings forecasts by analysts. Such effect is reduced for firms with extensive analyst following and in environmentally sensitive industries. However, these relationships are shown to be starker in Europe than in North America, i.e., environmental disclosure has a greater impact on analysts' forecasts but is also more greatly attenuated by analyst following and membership in an environmentally sensitive industry. Most observed relationships hold for either print- or web-based disclosure, except for North America in which web-based disclosure seems to have no impact on analysts' forecasting work.     

Equilibrium in economies with incomplete financial markets

This paper analyses an exchange economy in the absence of Arrow-Debreu complete markets. It is assumed that trading takes place in the sequence of spot markets and futures markets for securities payable in units of account. Unlimited short-selling in securities is allowed. A general equilibrium in such an economy is a set of current and future prices (contingent on uncertain events) and a set of individual plans such that all markets are cleared. The existence of such an equilibrium is proved under usual assumptions. This is in contrast to the case of futures markets for contingent futures commodities where an equilibrium may not exist. The optimality of equilibrium allocations is also discussed.     

A multi-region model of economic growth with human capital and negative externalities in innovation

We use a multi-region model and provide the first theoretical analysis of the effects of human capital use and a particular kind of innovative activity on economic growth. In each of the N heterogeneous regions in our model, consumers have constant relative risk aversion preferences, there are negative externalities in innovation, and there are three kinds of manufacturing activities involving the production of blueprints for inputs or machines, the inputs or machines themselves, and a single final good for consumption. Our analysis generates four salient findings. First, for each of the N regions, we define a balanced growth path equilibrium, we characterize the market clearing factor prices, and we determine the free entry condition in the R&D sector. Second, we show that without growth in human capital, there is no sustained economic growth in any of the N regions. Third, we show that human capital growth generates sustained economic growth in each of the N regions. Finally, when discussing the above three findings, we shed light on the spatial dimensions of economic growth in our multi-region aggregate economy.     

Computable general equilibrium with financial markets

Summary. There are a wide variety of theoretical general equilibrium models with incomplete security markets. In this paper we give a general recipe for using homotopy algorithm to compute equilibria in these models. In many models, taxes, transaction-costs or other market frictions introduce the additional difficulty that equilibrium prices or choices (but not equilibrium allocations) may be undetermined. In order to demonstrate how these difficulties can be dealt with, we develop a globally convergent algorithm to compute equilibria in a model with cash-in-advance constraints, several goods and incomplete financial markets. Furthermore we describe how to implement the algorithm using a publicly available suite of subroutines for homotopy-pathfollowing. Received: October 1, 1999; revised version: December 16, 2000