The Role of Risk and Information for International Capital Flows: New Evidence from the SDDS

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper, we investigate whether better information about the macroeconomic environment of an economy has a positive impact on its capital inflows, namely portfolio and foreign direct investment (FDI). The purpose of our study is to explicitly quantify information asymmetries by compliance with the IMF's Special Data Dissemination Standard (SDDS). For FDI, we find statistically significant and robust support for this hypothesis: SDDS subscription increased inflows by an economically relevant magnitude of about 60 percent. We also find evidence of aversion against political and macroeconomic risk as determinants of portfolio and FDI flows and use a non-parametric test for spatial correlation in the residuals of capital flows.

Nothing to hide: Commitment to, compliance with, and impact of the special data dissemination standard

“…Glennerster and Shin () also find that smaller countries with less liquid debt markets benefited due to SDDS subscription, as the private sector has less incentive to monitor the availability of accurate information in these countries. Hashimoto and Wacker () find that joining the SDDS program had a positive influence on portfolio and foreign direct investment in addition to reducing borrowing costs. Thus, there is at least some support of material benefits from joining the SDDS.…”

“…Fratzscher and Reynaud (2011) similarly in a study of surveillance announcements on Public Information Notices (PIN) of IMF investor behavior in 36 emerging markets, find that financial markets respond favorably to PIN announcements made by the Fund. 4 Finally the SDDS program provides incentives for countries in need of short-term external finance to improve transparency (Hashimoto & Wacker, 2012). Collectively, this could increase the attractiveness of a country as an investment destination to investors as they often lack the time and resources to collect data (Gelos, 2002), and have to deal with untimely, irregular, and lack of authentic information provided by domestic institutions (Fratzscher & Reynaud, 2011).…”

“…Indeed, a large literature highlights the importance of data transparency in attracting foreign investment, reducing herd behavior, market volatility, and borrowing costs, while improving forecasts and even increasing corporate earnings (Brennan, Henry Cao, Strong, & Xinzhong, 2005;Core, 2001;Easley & O'Hara, 2004;Gelos & Wei, 2005;Graham, Johnston, & Kingsley, 2013;Hashimoto & Wacker, 2012). In an early empirical study of the SDDS, Mosley (2003) argued that the success of the SDDS in improving market outcomes would depend on the cooperation of market actors.…”

Do Transparency Initiatives Work? Assessing the Impact of the Special Data Dissemination Standard (SDDS) on Data Transparency

“…Likewise, there is also evidence to show that international portfolio investors react favourably to an improvement in a country's level of transparency. For instance, Hashimoto and Wacker (2012) find that countries subscribing to transparency initiatives witness an increase portfolio and direct foreign investments. Similarly, Berliner (2012) finds that transparency initiatives to promote accountability tend to attract FDI inflows in the long run.…”

“…This is the gap in the literature this paper seeks to fill, by providing first quantitative evidence on whether the variation in data transparency among countries can be explained by accession to the SDDS initiative. A large number of studies in the literature have highlighted the importance of data transparency in attracting foreign investment, reducing herd behavior, lowering market volatility, borrowing costs, improving forecasts and even corporate earnings (see Graham, Johnston, Kingsley 2014, Hashimoto and Wacker 2012, Brennan et al 2005 Wei 2005, Easley and Hara 2004, Core 2001, Diamond and Verrechia 1991. Thus, it can be argued that compliance of a country with transparency promoting initiatives such as the SDDS program on releasing accurate data affects the actual level of transparency in the country.…”