The Composition of Capital Flows When Emerging Market Firms Face Financing Constraints 1

  title={The Composition of Capital Flows When Emerging Market Firms Face Financing Constraints 1},
  author={Katherine A. Smith and Diego Valderrama},
Using a small open economy framework, we model the composition of capital inflows as the equilibrium outcome of emerging market firms’ financing decisions. We show that debt limits, equity issuing costs, and foreign direct investment search costs generate a financing premium and that the “cheapest” source of financing depends on the phase of the business cycle and past financing decisions. The model delivers several results that are consistent with stylized facts observed in emerging markets… CONTINUE READING


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