Information, Resource Allocation, and the Development of Financial Markets

Posted: 10 May 1998

See all articles by Avanidhar Subrahmanyam

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: Undated

Abstract

This paper explores the linkages between the informational efficiency of stock prices, corporate investment and financing decisions, and the development of equity markets in emerging economies. We begin with the premise that investors obtain information costlessly and purely by chance (i.e., "serendipitously"), as well as by expending scarce resources, and show that publicly financed firms generally make better investment decisions than privately financed firms when the influence of serendipitous information on firm values is sufficiently strong. In this case, resources are allocated more efficiently in an economy where most firms are publicly rather than privately financed. However, because of externalities, an inferior equilibrium can exist where most firms remain privately financed.

JEL Classification: G14, G32, G38

Suggested Citation

Subrahmanyam, Avanidhar and Titman, Sheridan, Information, Resource Allocation, and the Development of Financial Markets (Undated). Available at SSRN: https://ssrn.com/abstract=7396

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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