Equity Market Liberalization Research Articles

Unlocking Growth: The Cross-Market Spillover Effect of Equity Market Liberalization on Bond Costs

Unlocking Growth: The Cross-Market Spillover Effect of Equity Market Liberalization on Bond Costs

Capital account liberalization, financial dependence and technological innovation: Cross-country evidence

We study how capital account liberalization affects technological innovation. We provide robust evidence that industries more dependent on external finance have disproportionately higher innovation performance in economies with a more liberalized capital account. Among the components of capital account liberalization, although both equity market liberalization and outward FDI by domestic firms have sizable effects on innovation, they affect it differently. While equity market liberalization helps alleviate financial constraints by facilitating access to external finance, outward FDI by domestic firms promotes innovative activities by increasing internal finance from foreign operations. Further analysis indicates that the innovation-enhancing effects of capital account liberalization are limited mainly to countries with relatively well-developed financial systems and strong institutional quality, even in periods of financial crisis.

A Closer Look at the Effects of Equity Market Liberalization in Emerging Markets

Abstract Earlier studies have linked equity market liberalization to growth in emerging markets. Some conclude liberalization causes growth, whereas others contend contemporaneous economic policies and conditions play important roles. The causal argument contends that foreigner investability in public firms leads to lower discount rates and greater share issuance, investment, and efficiency. Using three separate measures of foreign investability, we do not find these effects. Moreover, common de jure foreigner-investability measures are poor de facto measures. Economic indicators, not directly influenced by equity market liberalization, also grow faster in countries with more investable firms. Our findings suggest foreigner investability cannot fully explain the equity-market-liberalization-growth relation. (JEL F30, F38, G30, G24, G15)

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.

Economic Freedom and Private Capital Inflows in Selected South Asian Economies: A Dynamic Panel Data Evidence

Greater inflows of private capital are regarded to be very beneficial for the economic development. This study explores the relationship between economic freedom and private capital inflows in selected South Asian economies. The study comprises of six South Asian countries (India, Pakistan, Bangladesh, Sri Lanka, Nepal and Maldives). Data from 2002 to 2011 have been utilized, and the model is estimated by employing the system generalized method of moments (GMM) approach. Empirical results reveal a significant positive relationship between economic freedom and private capital inflows. The study transpired that economic freedom is potent determinant of private capital inflows. The results further established that growth in market size and official development assistance has significant positive association with private capital inflows, whereas exchange rate exhibits significant negative relationship with the inflows of private capital, thereby confirming the existing literature. Moreover, the relationship among inflation, natural resources and private capital inflows came out to be inconclusive. To lure more inflows of private capital towards the region, management authorities need to ensure high degree of economic freedom. Creation of investment-friendly climate, corruption-free environment, tax breaks in selective sectors, removing trade barriers, equity market liberalization and consistency in the government policies is advisable in this regard.

Equity Market Liberalization, Information Asymmetry and Cost of Capital

This paper examines the effect of expanding an economy’s investor base to include foreign investors on the pricing of information asymmetry. When equity markets are imperfectly competitive, theory predicts that information asymmetry will be priced. But whether the pricing diminishes as the investor base expands to include more investors depends on whether the investors are informed or uninformed; as such it remains an open empirical question. Given the cross-sectional and temporal variation in the level of competitiveness in emerging equity markets, markets of this nature provide an ideal setting to examine whether expanding the investor base to include foreign investors affects the price impact of information asymmetry. Employing equity market liberalization for 27 countries between 1996 and 2006 as shocks to foreign investor participation, we find that the pricing of information asymmetry declines as an economy’s foreign investor base expands.

Financial liberalization and the relationship-specificity of exports

We investigate the causal impact of equity market liberalizations on sectoral export performance across 91 countries (1980–1997). The increased availability of external finance has boosted trade of industries that intensively use relationship-specific inputs, and lowered exports of industries using standardized inputs.

Credit constraints, equity market liberalization, and growth rate asymmetry

This paper provides evidence that financial openness is an important determinant of growth rate asymmetry in emerging markets. I exploit exogenous shocks to financial flows and examine the impact of equity market liberalization on the skewness of output growth for 93 countries during the 1973–2009 period. I show that opening the economy to foreign portfolio investment results in a substantially higher negative skewness of output growth. This result obtains with equal strength in the aggregate data and in the sectoral data, and it is disproportionately stronger in sectors that require more external finance. The skewness effect of financial openness is stronger in countries which experienced a banking crisis after liberalization.

Legal protection of investors, corporate governance, and investable premia in emerging markets

We examine the interaction between the legal protection of investors, corporate governance, and investable premia in emerging markets. In a multi-country setting and using a novel dataset we find that better-governed firms experience significantly greater stock price increases upon equity market liberalization. We look to see whether well-governed firms in poorly governed countries enjoy an investability premium as measured by Tobin's q. We find that they do. Investors look beyond the seemingly weak country-level governance structures, and focus on corporate governance.

Equity Market Liberalization and Equity Issuance

Previous studies link equity market liberalization to economic growth in emerging markets. In 24 emerging markets, liberalizations always coincide with other economic reforms, making identification tenuous. Theories linking liberalization to growth predict that at the firm-level liberalization leads to significant foreign ownership and influence on management, more external finance, and higher investment. We fail to find evidence that is consistent with any of these theories. Our findings suggest that either liberalization does not cause growth or that it promotes growth through a channel that is absent from the current literature.

Equity Market Liberalization, Credit Constraints and Income Inequality

Abstract This paper provides compelling evidence that equity market liberalization, as the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality by promoting increased human capital accumulation. The authors examine the effect of equity market liberalization on inequality by using data from 72 countries for 1980–2006. Their measured effect is robust to alternative measures of equity market liberalization. Finally, The authors show that foreign equity flows benefit initially lessactive stock markets more than the active ones, providing evidence that foreign equity flows act as a substitute for domestic financial markets. This finding emphasizes the possibility of reducing inequality and poverty through equity market liberalization.

Equity market liberalization and firm growth

In a sample of 686 investable firms from 26 emerging market countries, I show that equity market liberalizations do not result in an increase in externally-financed growth rates for participating firms. In fact I find mostly to the contrary. These findings are in line with recent work which shows that firms issue less and not more equity capital post-liberalization, and suggest the gains from equity market liberalizations may not be attributable to a reduction in financing constraints.

Financial Liberalization and the Relationship-Specificity of Exports

We investigate the causal impact of equity market liberalizations on sectoral export performance across 91 countries (1980 - 1997). The increased availability of external finance has boosted trade of industries that intensively use relationship-specific inputs, and lowered exports of industries using standardized inputs.

Equity Market Liberalization and Firm Growth

Using a sample of 686 investable firms from 26 emerging market countries, I show that equity market liberalizations do not result in an increase in externally-financed growth rates for participating firms. In fact, I find mostly to the contrary, and at best, I find that investability is associated with no significant change in the contribution of external financing to firm growth. These findings are in line with recent work which shows that firms issue less equity capital post-liberalization, and suggest that the gains from equity market liberalizations may not be attributable to a reduction in financing constraints.

Corporate Governance, Finance, and the Real Sector

AbstractWe present a theory of the linkages between corporate governance, corporate finance, and the real sector of an economy. Using a structural model of industry equilibrium with endogenous entry, we show that poor corporate governance leads to low levels of competition, and to firms with high insider ownership and leverage. In contrast, good corporate governance promotes the adoption of more efficient technologies and development of sectors more exposed to moral hazard. We use our model to study equity market liberalization, and we show that liberalizations facilitate entry and adoption of more productive technologies, especially in countries with good corporate governance.

Financial Liberalization, Banking Crises and Economic Growth: The Case of South Mediterranean Countries

The central aim of this paper is to empirically assess the effects of financial liberalization on economic growth in the presence of banking crises. Our empirical investigation is based on a dynamic panel model for a sample of 10 South Mediterranean countries during the period 1980-2005. Results suggest that equity market liberalization positively affects economic growth in these countries, especially in the period of fragility and banking crises. Capital account liberalization, however, has no significant effects. As expected, banking crises exert negative effects on economic growth. When we control for the presence of macroeconomic stability and appropriate openness sequencing, the anticipated effects of capital account liberalization become significant. We conclude that macroeconomic reforms and trade opening are both crucial prerequisites for the success of the capital account liberalization process.

ON THE GROWTH EFFECTS OF EQUITY MARKET LIBERALIZATION

While equity market liberalization has been found to be associated with faster economic growth, such a correlation alone cannot identify the direction of causation. Using instrumental variables (IV) methodology, this paper presents empirical evidence of strong growth effects of equity market liberalization. Systematic differences exist in the growth effects across countries at different income levels, and with different size of equity markets. Equity market liberalization benefits high-income and middle-income countries through productivity improvements, while growth instead increases in low-income countries as a result of increased physical capital accumulation. Additional growth effects are found for countries having larger equity markets.

Legal Protection of Investors, Corporate Governance, and Investable Premia in Emerging Markets

We examine the interaction between the legal protection of investors, corporate governance within firms, institutional development between countries, and investable premia in emerging markets. In a multi country setting and using a novel dataset we find that better-governed firms experience significantly greater stock price increases upon equity market liberalization. We look to see whether well-governed firms in poorly governed countries enjoy an investability premium as measured by Tobin’s q. We find they do. Investors look beyond the seemingly weak country-level governance structures, and focus on corporate governance.

Equity Market Liberalization, Credit Constraints and Income Inequality

This paper provides compelling evidence that equity market liberalization, the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality through increasing the accumulation of human capital. We examine the impact of equity market liberalization on inequality by using the data of 72 countries during 1980-2006. The effect is robust to alternative measurements of equity market liberalization. Furthermore, equity market liberalization is associated with the different effects of credit constraints on the persistence of cross-dynastic income inequality. Finally, it is proved that foreign equity flows benefit the initially less active stock markets more than the active ones, which is important evidence that foreign equity flows act as a substitute for the domestic financial market. This finding emphasizes the importance of equity market liberalization for the poor, which helps to reduce inequality.

Suppliers, Investors, and Equity Market Liberalizations

Equity market liberalizations allow foreign investors to acquire ownership stakes in domestic firms. Previous research on the real impact of these events has therefore emphasized the interactions between firms and investors. This paper shows that cross-border equity flows also improve buyers-suppliers relationships with positive ramifications for economic growth. Firstly, a buyer backed by foreign capital means a smaller probability of contract failure due to default or some liquidity problems. Secondly, liberalization-driven improvements in public and corporate governance decrease the risk of a deliberate breach of contract. Cross-border equity flows can thus reassure upstream firms about the financial stability and contractual reliability of their corporate customers. Results from panel data and event-study approach confirm that equity market liberalizations boost output growth particularly in industries dependent on the trust of their suppliers, establishing a novel channel from financial globalization to the real economy.