Chapter 23, Problem 12CC

Summary Introduction

Capital markets:

Capital markets can be defined as the markets for buying and selling equity and debt instruments. These markets are important for the functioning of an economy, since capital is a significant component to generate the economic output.

Segmentation of financial or capital markets:

The major reasons for segmentation of capital markets are differential access to markets and macro-level distortions. In differential access to markets, a nation’s risk-free securities are internationally integrated but markets for a specific firm’s securities are not. Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them. In macro-level distortions markets for risk-free instruments can also be segmented. The most significant macroeconomic reasons that are responsible for segmented capital markets include capital controls and foreign exchange controls. These factors create barriers to international capital flows thereby segmenting national markets.

To determine:

The main implication for international corporate finance of a segmented financial market.