The Capital Effects of Information Voids in Emerging Markets

Abstract

The absence of local public information about a host country’s investment environment is an institutional void that plagues foreign investors in emerging markets, yet little existing research analyzes the precise nature of that information void or the heterogeneity in foreign investors’ strategies to manage the lack of publicly-available investment-relevant information. This paper presents a 2x2 typology of information (local/global and public/private) to clarify the concept of information, and disaggregates foreign investors into what is commonly understood as the universe of private cross-border capital flows: direct investment (FDI), portfolio investment (FPI), and bank debt. We develop theory to predict variation in foreign investors’ sensitivity to local public information voids, arguing that banks are least sensitive to information voids; FPI is moderately sensitive; and FDI is most sensitive. Using novel time-series cross-sectional data on local public information and capital flows to the 30 largest emerging markets from 1978 to 2012, we find preliminary evidence of the relative sensitivity of different investors to widening information voids. ⇤Author order is alphabetical by convention. All three authors contributed to the paper equally. Corresponding author available at 55 Colchester Avenue, Burlington, VT, 05405, +1.802.656.3464 (o), +1.802.656.8279 (f), allison.kingsley@uvm.edu. †Special thanks to Institute of International Finance (IIF) and the Credendo Group for data use and permissions; three anonymous reviewers and our editor Mona Makhjia for valuble comments; participants at Harvard Business School / JIBS Paper Development Workshop (2015), International Political Economy Society Annual Meeting (2013), and University of Southern California’s Center for International Studies Faculty Workshop (2014) for helpful feedback. The conclusions of this paper are the responsibility of the authors.