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Financial liberalization, private investment and portfolio choice: Financialization of real sectors in emerging markets

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  • Demir, FIrat

Abstract

Using firm level panel data, we analyze the impacts of rates of return gap between financial and fixed investments under uncertainty on real investment performance in three emerging markets, Argentina, Mexico and Turkey. Employing a portfolio choice model to explain the low fixed investment rates in developing countries during the 1990s, we suggest that rather than investing in irreversible long-term fixed investments, firms may choose to invest in reversible short-term financial investments depending on respective rates of returns and the overall uncertainty in the economy. The empirical results show that increasing rates of return gap and uncertainty have an economically and statistically significant fixed investment reducing effect while the opposite is true with respect to financial investments.

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Bibliographic Info

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

Volume (Year): 88 (2009)
Issue (Month): 2 (March)
Pages: 314-324

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Handle: RePEc:eee:deveco:v:88:y:2009:i:2:p:314-324

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

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Keywords: Private investment Portfolio choice Uncertainty Financialization;

References

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Citations

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Cited by:
  1. Cavallo, Eduardo & Galindo, Arturo & Izquierdo, Alejandro & León, John Jairo, 2013. "The role of relative price volatility in the efficiency of investment allocation," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 1-18.
  2. Demir, Firat, 2010. "Exchange Rate Volatility and Employment Growth in Developing Countries: Evidence from Turkey," MPRA Paper 24477, University Library of Munich, Germany.
  3. DemIr, FIrat, 2009. "Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets: Private Investment and Cash Flow Relationship Revisited," World Development, Elsevier, vol. 37(5), pages 953-964, May.
  4. Alessandro Federici & Pierluigi Montalbano, 2012. "Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis," Working Paper Series 3612, Department of Economics, University of Sussex.
  5. Engelbert Stockhammer, 2010. "Financialization and the Global Economy," Working Papers wp240, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Alexandre Messa, 2012. "Structural Change in The Brazilian Economy in The 2000s," Discussion Papers 1770, Instituto de Pesquisa Econômica Aplicada - IPEA.

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