Essays on capital markets with information frictions

Abstract

This dissertation consists of three essays in Capital Markets with Information Frictions. In the first chapter, I study the regulation of the name market conceptualized as merger & acquisition(M&A) market. By introducing a name market in the sense of Tadelis, 1999 into an endogenous growth model in which an informational asymmetry exists between capital producing borrowers and lenders, we show a name market screens the borrowers at the expense of crowding out real investment. The optimal name price trades off the screening effect and the crowding out effect. The social planner could either impose a price ceiling or levy a reimbursement tax to achieve the optimal name price. When the net worth is lower than the optimal name price, capital income tax may be allowed to subsidize the name purchase to activate the name market. Our results hold with more general productivity distribution.

In the second chapter, I discuss how to tax the name? We answer this question by introducing a name market in the sense of Tadelis, 1999 into an endogenous growth model in which an informational asymmetry exists between capital producing borrowers and lenders. We show a name market endogenously arises to screen the borrowers but at the cost of crowding out investment. We derive the optimal name price that trades off the screening effect and the crowding out effect and show this optimal price decreases with the investor protection level. An optimal tax scheme should tax the name to this optimal price and reimburse the tax revenue to the name buyer. When the investor protection level is low, the net worth could be lower than the optimal name price, so capital income tax shall be allowed to subsidy the name purchase to activate the name market. Overall, we show the optimal tax scheme in the presence of a name market depends crucially on the country’s investor protection level.

In the third chapter, I study the corporate ESG strategy in capital markets, namely, the corporate bond market and the stock market. The enterprise adheres to the goal of ESG investment, which helps enterprises improve their risk resistance, win the favor of investors, and give enterprises more opportunities to raise development funds. It ensures the future development of enterprises and a net gain for the business. However, some enterprises, under the banner of caring about social and environmental issues, seek their own interests and expand their influence. In this paper, we build a theoretical model to explain how ESG performance can facilitate the issuance of corporate bonds and what is the incentives for ESG false disclosure. Furthermore, we find in equity market, the impact is uncertain for enterprises at different development stages. Besides, even in the face of some negative shocks of ESG false disclosure, confidence prevents large-scale divestments from happening.