Siddiqi, Hammad (2008): Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument.
Download (54kB) | Preview
Information flows are necessary for well-functioning financial markets. However, in many emerging markets, the legal and institutional preconditions for proper information flow are not met. How do such markets respond? We argue that they respond by developing innovative information transmission mechanisms. We identify one such mechanism associated with the evolution of equity markets in South Asia. The mechanism operates through a financing instrument unique to India and Pakistan, called badla in local parlance. We develop a signaling model in which a broker-financier signals his private information to investors by choosing various levels of financing to provide in the badla market for stocks. A fully separating equilibrium exists allowing full discrimination of various types of stocks. Hence, information transmission takes place through this channel.
|Item Type:||MPRA Paper|
|Original Title:||Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument|
|Keywords:||Signaling, Information Transmission, Separating Equilibrium, Badla-Financing, Emerging Markets|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
|Depositing User:||Hammad Siddiqi|
|Date Deposited:||13. Jan 2008 05:23|
|Last Modified:||13. Feb 2014 19:16|
Akerlof, George A. (1970), “The Market for ‘Lemons’: Quality Uncertainty and Market Mechanism”, Quarterly Journal of Economics, Vol. 84, 3, 488-500.
Berkman, H. and Eleswarapu, Vinket R. (1998), “Short-term Traders and Liquidity: A Test using Bombay Stock Exchange Data”, Journal of Financial Economics, 47, 339-355.
Bhattacharya, S. (1979), “Imperfect Information, Dividend Policy, and ‘the Bird in the Hand Fallacy’ ”, Bell Journal of Economics, 10, 259-270.
Black, B. (2001), “The Legal and Institutional Preconditions for Strong Stock Markets”, UCLA Law Review, 48, 781-855.
Echeverri-Gent, J. (2002), “Politics of Market Microstructure: Reforming India’s Equity Market Institutions”, Paper presented at the annual meeting of American Political Science Association, http://www.allacademic.com/meta/p65338_index.html.
Husain, F., and Rashid, A. (2007), “Badla Investment in the Karachi Stock Exchange: An Investigation of Causal Relations”, PIDE working paper.
John, K. and William J. (1985), “Dividends, Dilution and Taxes”, Journal of Finance, 40, 1053-1070.
Leland, H. and Pyle, D. (1977), “Information Asymmetries, Financial Structure, and Financial Intermediation”, Journal of Finance, 32, 371-387.
Meyers, S. and Majluf, N. (1984), “Corporate Financing and Investment Decisions when Firms have Information that Investors do not have”, Journal of Financial Economics, 13, 187-221.
Miller, Merton H., and Rock, K. (1985), “Dividend Policy under Asymmetric Information”, Journal of Finance, 40, 1031-1051.
Ross, Stephen A. (1977), “The Determination of Financial Structure: The Incentive Signaling approach”, Bell Journal of Economics, 8, 23-40.
Uppal, Jamshed Y. and Mangla, Inayat U. (2007), “Market Manipulation, Volatility and Regulatory Response: A Comparative Study of Bombay and Karachi Stock Exchanges”, Working paper.
Vermaelen, T. (1984), “Repurchase Tender Offer, Signaling, and Managerial Incentives”, Journal of Financial and Quantitative Analysis, 163-181.