Autore
Capasso, Salvatore

Titolo
Bankruptcy Costs, Dilution Costs and Stock Market Development
Periodico
Università degli Studi di Napoli 'Parthenope' - Istituto di Studi Economici. Working paper
Anno: 2004 - Volume: 3 - Fascicolo: 1 - Pagina iniziale: 1 - Pagina finale: 29

This paper presents a dynamic general equilibrium analysis of stock market development, providing a theoretical support for the empirical positive correlation between equity markets development and economic growth. If potential investors are unable to distinguish between good (high productivity) and bad (low productivity) firms, then problems of adverse selection may arise, leading to a low price of equities as bad firms are attracted to the market and good firms are driven from the market – the dilution cost of asymmetric information (Bolton and Freixas. 2000). As a consequence, average productivity will be depressed and the economy will evolve along a relatively low growth path. The greater is the degree of asymmetric information, the greater will be the severity of the problem due to a greater (lower) number of bad (good) firms exploiting investment opportunities. Problems of asymmetric information are likely to become less acute as an economy develops and more resources become available for allowing investors to identify good firms and for allowing good firms to signal their own identity. Under such circumstances, the price of equities rise, attracting an increasing number of good firms to the equity market which, in turn, has a positive feedback effect on capital accumulation and growth.




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