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

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Demir, FIrat

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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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Publisher 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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Related research
Keywords: Private investment Portfolio choice Uncertainty Financialization;

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    Other versions:
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  17. Diego Comin & Sunil Mulani, 2006. "Diverging Trends in Aggregate and Firm Volatility," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 374-383, 06. [Downloadable!] (restricted)
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