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The quality effect: Does financial liberalization improve the allocation of capital?

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  • Abiad, Abdul
  • Oomes, Nienke
  • Ueda, Kenichi

Abstract

The study documents evidence of a "quality effect" of financial liberalization on allocative efficiency, which is measured by the dispersion in Tobin's Q across firms. Based on a simple model, the authors predict that financial liberalization, by equalizing access to credit, reduces the variation in expected marginal returns. They test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. They find strong evidence that financial liberalization, rather than financial deepening, improves allocative efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 87 (2008)
Issue (Month): 2 (October)
Pages: 270-282

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Handle: RePEc:eee:deveco:v:87:y:2008:i:2:p:270-282

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Web page: http://www.elsevier.com/locate/devec

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References

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  24. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 285-315, 04.
  25. Ashoka Mody & Abdul Abiad, 2005. "Financial Reform: What Shakes It? What Shapes It?," IMF Economic Issues 35, International Monetary Fund.
  26. Cemile Sancak, 2002. "Financial Liberalization and Real Investment: Evidence from Turkish Firms," IMF Working Papers 02/100, International Monetary Fund.
  27. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
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