Question

To what extent Foreign capital flows to the stock market are affected by various restrictions and transaction costs, liquidity aspects and asymmetric information problems??

Answer 1

Foreign capital flows are highly affected by domestic led factors which could be attributed to various restrictions and transaction cost as well as liquidity crunch in the economy along with asymmetric information problems.

there are various restrictions regarding an investment into a domestic country as domestic country always wants to protect its currency as well as the the control over it's company so they do not allow much of the foreign investment into the country smoothly, they have put a lot of restrictions. So it is leading to less amount of foreign investment.

There are several transaction cost which would also be attributed to restrictive policies as the government is highly sceptical of their control over domestic companies. there are other problems like liquidity crunch in a domestic economy which also do not help to the cause of foreign investment.

there are asymmetric information problems because all the informations is not correctly available to each person and there is a information gap so foreign investors always want high disclosure and transparency environment .such asymmetric information prevent them from investing into the domestic country.

These factors always lead to influence on the foreign investment to a very high extent.