Firm-level Impacts of Pro-Market Reforms: Latin America as a Laboratory

Abstract

The impact of pro-market reforms on the profitability of companies has been investigated for more than two decades, but accumulated results are still inconclusive. While there has been general agreement in terms of the reasons why pro-market reforms would be expected to lead to higher profitability, findings across studies have been mixed. The present study improves over past research by employing causal analysis methods (specifically, vector autoregression and impulse response functions) and by using more appropriate sampling of countries and of firms (specifically, multiple countries that are comparable and that illustrate opposing directions of reforms). We use firm-level data from 1,248 publicly listed firms in seven Latin American countries, 2000-2016. Although our results were not statistically significant as regards the relationship between pro-market reforms and firm profitability (return on sales), our findings do indicate a positive relationship between pro-market reforms and operational efficiency (reduction in administrative and selling expenses) as well as between pro-market reforms and financial leverage (corporate indebtedness and interest expenses), as expected.