Capital market imperfection

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The capital market imperfection has its roots in the theoretical model of the perfect capital market . One speaks of an imperfect capital market as soon as one of the conditions of the perfect capital market is not fulfilled. In reality, there is an imperfect capital market due to bankruptcy costs , transaction costs , asymmetrically distributed information, limited rational behavior and undiversified portfolios .

Technical advances , in particular the increasing availability of information through the Internet , but also government measures to increase the transparency of the capital markets and falling transaction costs due to increasing competition, are leading to an approach, albeit only slightly, to the perfect capital market.

To this day there is no closed theory of the imperfect capital market. In contrast, the perfect capital market is clearly defined. Due to the variety of possible forms of imperfection, there is no such thing as “the” model of the imperfect capital market. The following describes various forms of capital market imperfections as they can be observed in the financial markets.

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Asymmetrical information

Capital market imperfections can be derived from information asymmetries . The market partners on the credit market , financiers and investors, are informed in different ways about the investment program and its risks. Companies looking for capital usually have better information about the possible risks and returns of the planned investments than investors. The prerequisite for the unrestricted transparency of the perfect capital market is therefore not given, since not every market participant has access to all information and at all times. Information asymmetry can appear in two different forms: before and after the conclusion of a contract. The presence of asymmetric information essentially leads to two problems: adverse selection and moral hazards . The problem of adverse selection arises even before the contract is signed and deals with the displacement of "good" risks from "bad" risks. Moral hazard, on the other hand, only arises after the contract has been signed and describes the danger that individuals will behave irresponsibly or carelessly - contrary to the interests of the lender. To solve both problems, information must be collected, processed and evaluated. In solving these problems, the banking system is of particular importance for the real economy, as it collects and evaluates information and thus reduces information asymmetries. The smaller the imperfections of the capital market, the better the capital transfer works and the more credits can be mobilized for investments.

Limited capital market

A significant case for market imperfections are different debit and credit interest rates . Contrary to the model of the perfect capital markets, investments and financing can then no longer be exchanged at will, but are associated with additional costs. The difference between the two interest rates can be interpreted as "banking costs". In reality, investments are therefore associated with financing costs . The amount of the financing costs varies. Different debit and credit interest rates arise from the fact that companies receive a lower interest rate for investments than they pay for a loan. Transaction costs or minimum reserve obligations can also be the reason for the difference.

Strict capital rationing

Capital is scarce. Both borrowing and investing funds are limited. Strict capital rationing occurs when a market participant in question can raise a maximum of a certain amount of money at a given interest rate. As a rule, economic agents have only limited opportunities to finance themselves through the capital market. The granting of credits is linked to the provision of collateral, which is not available to any extent. An increasing level of indebtedness often requires a higher interest rate. If the cost of financing increases the more capital is raised, then there is a form of capital market imperfection known as poor capital rationing. The global competition for capital means that companies have difficulty obtaining capital on the capital markets if their profitability is too low for a given risk. This is tightened by the regulations of the Basel Committee (“Basel II”) and the Basel III follow-up agreement . Accordingly, banks must comply with stricter capital adequacy regulations when granting loans and use external or internal ratings to determine the risk of the company or loan. The consequences are poorer credit conditions and, especially for the generally low ratings of smaller medium-sized companies, a limited credit line.

All cases of capital market imperfection have in common that the costs of financing a particular investment under consideration depend (among other things) on which other investments are carried out and which financial investments and which other financings are carried out. In general, with an imperfect capital market, it is not possible to assess an investment in isolation and independently of the subjective wishes and individual situation of an investor.

Examples

Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) by Lintner, Mossin and Sharpe is an equilibrium theory that assumes a perfect capital market. However, the results of capital market research show that neither the assumptions nor the implications are empirically convincing. The capital market-oriented approach derives the beta factor for quantifying risk and calculating the discount rate from historical share price returns . It is assumed that capital market data can be used to rationalize a company's return on investment. Findings from empirical capital market research have increasingly revealed anomalies in the CAPM method since the 1980s. Basu (1977) found that low-valued stocks can be expected to generate above-average returns. Many studies also show that the beta factor is poorly meaningful for forecasting stock returns. Thereafter, portfolios with a low beta tend to have a higher average return than predicted by CAPM, while portfolios with a high beta factor tend to have a lower average return than predicted by CAPM.

Volatility anomaly

The volatility anomaly expresses an inverse risk- return relationship. The basic assumption of capital market theory, which states that a higher risk (volatility) leads to a higher expected return, is doubted by some studies. Accordingly, companies with lower leverage and lower risk achieve higher profitability. In a study for the German capital market, it was even shown that the companies with the highest risk of return show a negative return on equity . The high return of companies with low risk cannot be explained by the models of the perfect capital market.

Individual evidence

  1. ↑ Shleifer, Andrei. "Inefficient Markets: An Introduction to Behavioral Finance". OUP Catalog. Oxford University Press, 2000; Haugen, Robert A. The Inefficient Stock Market: What Pays Off and Why. Prentice Hall, 2002.
  2. ↑ Breuer, Prof. Dr. Wolfgang. "Final appreciation". In financing, 361–62. Springer Fachmedien Wiesbaden, 2013.
  3. ^ Gontermann, Andreas. "Imperfect capital market and financial intermediaries". Business studies: wisu; Journal for training, examination, career entry and further training, Düsseldorf: Lange, ISSN 0340-3084, ZDB-ID 1202844. - Vol. 38.2009, 3, pp. 338–339, 342, 38, No. 3 (2009).
  4. ^ Schmidt, Reinhard and Eva Terberger. Fundamentals of investment and finance theory. Gabler Verlag, 1997.
  5. ↑ Hering, Thomas. Investment theory from the point of view of interest. Springer-Verlag, 2013.
  6. ^ Schmidt, Reinhard and Eva Terberger. Fundamentals of investment and finance theory. Gabler Verlag, 1997.
  7. ^ Gleißner, Werner, and Karsten Füser. Practical Guide to Rating and Financing: Strategies for SMEs. Vahlen, 2014.
  8. ^ Gleißner, Werner. "Capital market-oriented company valuation: Findings from empirical capital market research and alternative valuation methods". Corporate Finance 5, No. 4 (April 7, 2014): 151–67.
  9. ^ Gleißner, Werner. "Capital market-oriented company valuation: Findings from empirical capital market research and alternative valuation methods". Corporate Finance 5, No. 4 (April 7, 2014): 151–67.
  10. ^ Basu, p. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis". Journal of Finance 32, No. 3 (1977): 663-682.
  11. ↑ Zimmermann, Peter. Estimating and forecasting beta values: a study on the German stock market. Uhlenbruch, 1997.
  12. ^ Ang, Andrew, Robert J. Hodrick, Yuhang Xing, and Xiaoyan Zhang. "High idiosyncratic volatility and low returns: International and further US evidence". Journal of Financial Economics 91, No. 1 (Jan 2009): 1-23; Baker, Malcolm, Brendan Bradley, and Jeffrey Wurgler. "Benchmarks as limits to arbitrage: Understanding the low-volatility anomaly". Financial Analysts Journal 67, No. 1 (2011): 40-54.
  13. ↑ Christian, Walk Häusl. "The volatility anomaly on the German stock market  : with less risk, better performance". Corporate finance, corporate finance. - Düsseldorf: Handelsblatt, ISSN 1437-8981, ZDB-ID 25324184. - Vol. 3.2012, 2, pp. 81–86, 3, no. 2 (2012)