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ENDOGENOUS INFORMATION FRICTIONS, STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH *
Author(s) -
CAPASSO SALVATORE
Publication year - 2008
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2007.01057.x
Subject(s) - economics , information asymmetry , equity (law) , stock market , monetary economics , endogenous growth theory , debt , financial economics , finance , market economy , paleontology , horse , political science , law , biology , human capital
The aim of this paper is to provide further insights into the linkages between stock market development and economic growth. Under information asymmetries, higher return projects tend to be penalized since these projects are valued at the average, and lower than fair, price. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firms—typically, equity or debt. Growth occurring, informational costs decrease and so does the cost of equity relative to debt financing which spurs the development of stock markets.