By Helmut Dietl

This booklet explores a chain of questions on the variations within the capital markets in Japan, Germany and the USA, and comprises empirical and comparative reviews from the 3 nations.

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Unless these expectations differ among investors, only liquidity- and diversificationrelated transactions will occur. Two investors who have already diversified all unsystematic risk and who do not trade for liquidity reasons will exchange securities only on the basis of different individual expectations. Differing individual expectations are the result of incomplete private knowledge. In a society which is built on specialization and division of labor, almost every member i has privileged access to a different information source providing him or her with rather unique pieces of scattered knowledge S .

The price of debt is specified by interest rates. Information and incentive asymmetries prevent interest rates from perfectly adjusting to changes in supply and demand. Information asymmetries arise if potential borrowers cannot effectively signal their risk-preferences. Under these circumstances, creditors cannot assess the default risk of their loans and do not know whether borrowers will react to higher interest rates by undertaking riskier investments. Incentive asymmetries are caused by limited liability.

Investment companies and investment trusts may become corporate insiders by acquiring concentrated ownership rights. Nonexistent or weak laws against insider trading allow investment companies and investment trusts to benefit from their insider knowledge. As a result, fund intermediation enhances the informational efficiency of relational capital markets with respect to the aggregation and transmission of insider knowledge. (2) The division of investment decisions between savers and fund advisors is deter mined by a fund’s degree of specialization.

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