Domestic Financial Liberalization Research Articles

Financial liberalization and the investment-cash flow sensitivity

The decline and diminishment of investment-cash flow sensitivity remains a puzzle in literature. This paper attempts to address this puzzle by examining the heterogeneous effects of domestic financial liberalization and international financial integration on corporate investment-cash flow sensitivity. Using a large firm level data for 69 developed and emerging economies over the period 1995–2019, we provide robust evidence that firms in countries with more liberalized domestic financial markets exhibit lower sensitivity of investment to the availability of cash flows. Reducing financial constraints and then promoting external finance are possible mechanisms through which domestic financial liberalization affects investment-cash flow sensitivity. While the effect of international financial integration, on average, is less clear, our results show that increases in international financial integration promote investment more for firms with higher cash flows in high income economics but more for firms with lower cash flows in non-high income economies. Our paper provides new insights into the real effects of financial institutional arrangements on the economy.

Domestic financial liberalization and economic growth nexus: the role of corruption

PurposeThis study aims to examine the effect of domestic financial deregulation on economic growth in five selected sub-Saharan African nation (SSA). The paper also explored the interaction effect of domestic financial deregulation and corruption on growth.Design/methodology/approachThe paper used Driscoll and Kraay standard errors based on the pooled ordinary least squares, which is robust to heteroskedasticity, cross-sectional dependence and autocorrelation.FindingsThe outcome indicates that domestic financial liberalization has accelerated growth in SSA economies. Similarly, evidence reveals that foreign direct investment and credit to the private sector by banks accelerate growth. However, evidence indicates that labour and capital negate growth. Also, the interaction term for domestic financial liberalization and corruption shows a negative influence on growth. The study, therefore, recommends that well-tailored policy design and strategy be implemented to provide a smooth and conducive business environment for investors.Originality/valueNumerous studies have analysed the influence of financial deregulation on growth; however, none have examined the effects of domestic financial deregulation on growth in the context of SSA. Also, no studies have explored the interaction effect of domestic financial deregulation and corruption on growth.

Interest rate liberalization and economic growth nexus: does corruption matter?

PurposeThis paper aims to examine the impact of interest rate liberalization on economic growth and the relevance of corruption in the five selected sub-Saharan African countries.Design/methodology/approachThe study used the modified version of Driscoll and Kraay’s model by Hoechle, which solved the effects of cross-sectional dependence and heteroscedasticity.FindingsThe findings reveal a positive impact of the index on economic growth, and it was found that foreign direct investment (FDI) and credit to private sector by banks (CPSB) all stimulate economic growth. The interaction terms of corruption with FDI and CPSB indicate negative effects that show how corruption erodes the benefits of liberalization. Finally, the paper recommends the pursuit of appropriate policies with the sole aim of eradicating corruption and providing a conducive environment for business.Originality/valueThe paper developed a composite domestic financial liberalization index to capture the timing and essential dimensions of the reform process. The study investigates the effect of interest rate liberalization on economic growth and the relevance of corruption. Most of the recent and past studies only examined the impact of interest rate reforms on growth without investigating the relevance of corruption.

The Impact of Foreign Bank Entry on Chinese Banks and Financial Liberalization: Recent Evidence

Opening the market to foreign investors is an action which the Chinese government will take under the pressure of economic globalization. However, the impact on domestic firms and market needs to be investigated. This study uses disaggregate measures (foreign exposure index) to analyze how the entry of foreign banks affects domestic banks and the financial markets unlike previous studies which tend to employ aggregate measures (foreign banks number and foreign bank assets share). The results show that the entry of foreign banks has a significantly positive impact on the performance of domestic banks, which is in favor of the process of domestic financial liberalization.

Domestic financial reforms and crisis recoveries

AbstractWe examine empirically whether domestic financial reforms lead to faster recoveries from financial crises. Using a duration analysis approach and financial reform indicators from Abiad, Detragiache, and Tressel (2010), we find robust evidence that a higher overall level of domestic financial liberalization is associated with a significantly shorter duration of recovery. This effect exists in both the downturn and upturn stages of a crisis but matters only for developing countries. We also check the effect of each individual dimension of domestic financial reforms and find they all contribute to significant faster crisis recoveries except for privatization of the banking sector.

Impact of Board Structure on Insolvency and Credit Risk: Moderating role of Domestic and Transnational Financial Liberalization in Asian Banking Sector

Purpose-The aim of this study is to analyze the effect of board structure on risk-taking. It also takes financial liberalization as a moderator between board structure and risk-taking. Design/methodology/approach- Data of variables of interest has been obtained from the annual reports of banks and statistical reports published by Central Bank of concerned countries. Ten banks have been selected from every ten Asian countries during the period 2005 to 2015. GMM estimator is used for data analysis. Findings- Findings of the study reveal that both board size and board independence decrease risk-taking practices in sample economies. Further, the presence of powerful CEOs on board structure increases risk-taking. The most robust result has been proved for board independence as compared with board size and CEO/chairman duality. Financial liberalization moderates the relationship between board structure and risk-taking. Originality/value- Most of the previously published studies in this area use only one type of financial liberalization at one time. This study includes both types of financial liberalization: domestic financial liberalization and transnational financial liberalization, at one time. Laeven financial liberalization index has been created for concerned economies.

Impact of domestic financial liberalization on economic growth in Pakistan

This paper attempts to investigate the domestic components of the financial liberalization process in Pakistan and develops an index of domestic financial liberalization capturing the important dimensions of reform process. Employing the multivariate co-integration technique and error-correction mechanism, the results indicate a positive impact of the index on economic growth in the long run, while its short run impact is found to be negative. Empirical findings highlight the importance of further financial deepening and financial intermediation, in a conducive environment, that are essential components to successfully implement reforms for growth stimulation.

The Interest Group Theory of Financial Development: Evidence from Regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

The interest group theory of financial development: Evidence from regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

External Balance in Low‐Income Countries

This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run. (This abstract was borrowed from another version of this item.)

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Development of the Nepalese Financial System: Need for the Formulation of a Master Plan

The paper examines the development of Nepalese financial system which is categorized into three different phases: the first phase is the pre-NRB period; the second phase starts with NRB Act of 1955, which is further disaggregated into two sub-periods at 1984, the start of domestic financial liberalization; and the third and ongoing phase starts after enactment of current NRB Act of 2002. After analyzing period aggregate data on the financial system, the paper concludes that despite significant financial deepening in the context of financial liberalization and integration with the external economy, there is still scope for geographically balanced financial development. For addressing these challenges in a comprehensive manner, the study proposes initiating the development of a Financial Sector Master Plan.

External Balance in Low Income Countries

This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.

External Balance in Low Income Countries

This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.

Openness and Domestic Financial Liberalization: Which Comes First?

We use a new dataset of de jure measures of trade, capital account, product markets, and domestic financial regulation covering 91 countries from 1973 to 2005 to examine the links between openness and domestic financial liberalization. We find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result holds with different data frequencies (from annual to 5-year intervals), estimation methods (OLS and 2SLS), trade liberalization measures (tariff and non-tariff), and after controlling for domestic product market liberalization, whose agriculture component is a robust leading indicator of domestic financial liberalization in low- and middleincome countries. The primacy of trade liberalization is consistent with Rajan and Zingales’s (2003) positive interest-group theory of financial development and McKinnon’s (1991) normative “order of economic liberalization.” The data do not confirm, instead, either of the contrasting implications of these two theories for the sequencing of capital account and domestic financial liberalization.

How Do Domestic Financial Liberalization and Financial Openness Affect Corporate Leverage and Debt Maturity?

We assess the impact of domestic financial liberalization and international financial openness on leverage and debt maturity in a large panel of publicly traded non-financial firms in 22 advanced and 16 emerging market countries over the period 1994-2002. Financial liberalization is measured with a new index that tracks six separate dimensions of reform. Financial openness is measured using international liabilities of the private sector. We find that financial liberalization and openness lead to more leverage and longer debt maturity in advanced market countries. In emerging market countries, financial openness leads to an increase in leverage and a reduction in debt maturity, whereas financial liberalization reduces leverage and its effect on debt maturity depends on the type of reform.

Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges

This paper examines the economic importance of stock markets in Africa. It discusses policy options for promoting the development of the stock market in Africa. The results of the paper show that the stock markets have contributed to the financing of the growth of large corporations in certain African countries. An econometric investigation of the impact of stock markets on growth in selected African countries, however, finds inconclusive evidence even though stock market value traded seem to be positively and significantly associated with growth. African stock exchanges now face the challenge of integration and need better technical and institutional development to address the problem of low liquidity. Preconditions for successful regional approaches include the harmonization of legislations such as bankruptcy and accounting laws and a liberalized trade regime. Robust electronic trading systems and central depository systems will be important. Further domestic financial liberalization such as steps to improve the legal and accounting framework, private sector credit evaluation capabilities, and public sector regulatory oversight would also be beneficial.

Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges

This paper examines the economic importance of stock markets in Africa. It discusses policy options for promoting the development of the stock market in Africa. The results of the paper show that the stock markets have contributed to the financing of the growth of large corporations in certain African countries. An econometric investigation of the impact of stock markets on growth in selected African countries, however, finds inconclusive evidence even though stock market value traded seem to be positively and significantly associated with growth. African stock exchanges now face the challenge of integration and need better technical and institutional development to address the problem of low liquidity. Preconditions for successful regional approaches include the harmonization of legislations such as bankruptcy and accounting laws and a liberalized trade regime. Robust electronic trading systems and central depository systems will be important. Further domestic financial liberalization such as steps to improve the legal and accounting framework, private sector credit evaluation capabilities, and public sector regulatory oversight would also be beneficial.

The Impact of Domestic Financial Liberalization and International Financial Openness on Corporate Leverage and Debt Maturity

The Impact of Domestic Financial Liberalization and International Financial Openness on Corporate Leverage and Debt Maturity

Financial Sector Reforms in East Asia: A Survey of the Theoretical and Empirical Literature (1990-2000s)

The 1990s have been years of activism. The developed countries and most international financial organizations have been urging the developing countries to undertake rapid and comprehensive domestic and external financial liberalization. The crises that followed have now instilled a dose of caution. Liberalization is a risky step, one on which knowledge remains rudimentary. It concerns many different aspects. There is no urgency to undertake liberalization, and when it is taken, it should be approached as a delicate step calling for cautious policy reactions. The main focus of this paper is a survey of the modern theoretical and empirical literature on the topic of a financial sector reform in East Asian region. The paper is organized as following. Section 2 is devoted to financial liberalization as a main part of financial reforms, existing approaches for its implementation and potential positive or/and negative results of it. Section 3 is about financial reforms in East Asia. Section 4 offers some lessons from financial liberalization. Deep doubts, deep wisdom; small doubts, little wisdom. Chinese proverb