a r t i c l e i n f o a b s t r a c t We examine implications of a society's cultural emphasis on moral sentiments. Entrepreneurs and investors interact in a game that entails both adverse selection and moral hazard; entrepreneurs may attempt to breach their contracts and expropriate investors. An agent is born into a particular culture but chooses whether to develop a moral conscience and ther...

A simple framework is developed to analyze the important role of the bond market for the welfare of a long horizon small investor when both inflation and the real interest rate are stochastic. Closed form solutions for investor utility in different settings are used to show that the welfare loss due to the absence of long term bond markets increases with the investor’s horizon and risk aversion...

The state of capital markets looks particularly poor when we consider the efforts already undertaken to improve the macroeconomic environment and reform the institutions believed to foster financial development. In the case of Latin America, the results appear even more discouraging in light of the better evolution of capital markets in East Asia and their rapid growth in developed economies (e...

This paper quantifies the impact of changes in U.S. monetary policy on sovereign bond spreads in emerging market countries. Specifically, the paper explores empirically how country risk, as proxied by sovereign bond spreads, is influenced by U.S. monetary policy, country-specific fundamentals, and conditions in global capital markets. While country-specific fundamentals are important in explain...

Field Editor: G. Cassar This paper develops a theory of the participating convertible preferred (PCP) stock commonly used in venture capital settings. I show that the participation and convertibility features of PCP stock can be used to reduce information asymmetry between the venture and potential investors at the time of exit. Further, the convertibility feature of PCP helps in alleviating th...

This paper presents a perfect foresight model of speculative attacks on emerging markets. Credit constrained governments are assumed to have two objectives: to accumulate liquid assets in order to self-insure against shocks to national consumption and to insure poorly regulated domestic ®nancial markets. This policy regime generates endogenous ®scal de®cits de®ned to include the growth of conti...

The paper considers a two-country model of overlapping generation heterogenous economies with intergenerational transfers carried out in the form of bequest and investment in human capital. We examine in competitive equilibrium the transitory and long-run e!ects of capital markets integration. First, we explore how the regime of public education a!ects the dynamics of the integrated economy. Se...

The following is a summary of governance developments over the past year in select global capital markets. Included in the review are interviews with good governance advocates and observers detailing the impact of recent regulatory changes and governance trends in Hong Kong, Switzerland, and Turkey. A review of governance developments in major capital markets including the United Kingdom, Canad...

We show that the value of corporate diversification increased during the 2007–2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates’ access to internal capital markets became more valuable not just because external capital markets became more...