Highlighting Asymmetries: Re-Examining the Firm-Level Impacts of Pro-Market Reforms in Latin America

Abstract

Impacts of pro-market reforms on profitability have been investigated for more than two decades, but accumulated results still prove inconclusive. While there seems to be consensus highlighting why pro-market reforms would lead to higher profitability, findings remain mixed. We refine past research by 1) employing causal analysis methods (specifically, vector autoregression and impulse response functions) that improve upon previous techniques 2) using more appropriate sampling of countries and of firms (specifically, multiple countries that are comparable and that illustrate opposing directions of reforms), and 3) including additional key financial indicators as dependent variables to parse out the complex impacts of the reforms . Using firm-level data from 1,248 publicly listed firms from seven Latin American countries (2000-2016), our results offer novel insights. Interestingly, our results do not demonstrate a statistically significant result for the impact of pro-market reforms on profitability (return on sales). However, 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). Understanding these asymmetric effects, while also considering pro-market reversals, offers a more finely variegated lens to extant literature.