Floating without flotations-the exchange rate and the Mexican stock market: 1995-2001

Pegged exchange rates in capital importing countries partially ‘socialised’ the risks of international borrowing. A corollary of managed floating, therefore, is a reallocation of risk bearing to private capital markets. Equity finance offers explicit risk sharing but Mexican experience since 1995 co...

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Bibliographic Details
Published in:Journal of international development 2006-04, Vol.18 (3), p.299-318
Main Authors: Muñoz, Jesús, Snowden, P. Nicholas
Format: Article
Language:English
Subjects:
Borrowing
Capital flow
Corporate governance
Debt
Developing countries
Exchange rates
Floating
Floating exchange rates
Foreign aid
Foreign exchange rates
International trade
Mexican
Mexico
Risk management
Risk sharing
Securities markets
Stock exchange
stock market
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Summary:Pegged exchange rates in capital importing countries partially ‘socialised’ the risks of international borrowing. A corollary of managed floating, therefore, is a reallocation of risk bearing to private capital markets. Equity finance offers explicit risk sharing but Mexican experience since 1995 confirms that it may not expand spontaneously under a floating regime, despite buoyant international conditions. As an explanation for this disappointing outcome, the analysis highlights the implications of managed floating for equity demand when corporate debt is high. Policy must recognize that while firms need to reduce gearing, investors may not be attracted to the shares of indebted companies. Copyright © 2006 John Wiley & Sons, Ltd.
ISSN:0954-1748
1099-1328
DOI:10.1002/jid.1220