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Financial markets' imperfections and technology adoption

Tinn, Katrin (2007) Financial markets' imperfections and technology adoption. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

This thesis examines information imperfections in asset markets and its impact on economic performance through technology adoption and innovation. In a rational setting, where equity market participants take into account common public information in addition to their private signals about fundamentals, equity prices are persistently biased towards the public signals. Chapter 2 investigates the real effect of such mis-pricing, when R&D producing firms rely on equity finance. Relating to the recent technology stocks boom, the model shows how market's optimism causes more innovations. Furthermore, such optimism can generate gains in aggregate consumption. Chapter 3 analyzes equity markets' role in facilitating ownership transfer from entrepreneurs investing in adopting technology to managers running these firms once technology is adopted. Information imperfections in equity market affect entrepreneurs' willingness to invest in frontier technology in two ways. First, uncertainty about equity price or lack of market liquidity discourages technology adoption. This can explain slow technology adoption and limited venture capitalists' participation in under-developed equity markets. Second, imperfectly informed market participants take fast adoption as a positive signal. The resulting increase of expected market value encourages technology adoption. Probability of fast technology adoption is highest at an intermediate number of informed investors. Chapter 4 looks more closely into the extent of asset mis-pricing by endogenizing the variance of investors' private signals. Better quality of freely available public information reduces incentives to invest in private information and can magnify the extent of asset mis-pricing. Furthermore, in a dynamic setting, investors' react more slowly on changes of the fundamentals because incentives to invest in research are low in early trading periods. The chapter also shows that availability of longer price history might not bring asset prices closer to the fundamentals, as investors choose to free-ride on other investors' research efforts.

Item Type: Thesis (PhD)
Additional Information: © 2007 Katrin Tinn
Library of Congress subject classification: H Social Sciences > HG Finance
T Technology > T Technology (General)
Sets: Departments > Economics
Supervisor: Kiyotaki, Nobuhiro and Ngai, Rachel
URI: http://etheses.lse.ac.uk/id/eprint/85

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