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Size Matters: The Impact of Capital Market Liberalization on Individual Firms

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Author Info

  • Peter Christoffersen

    ()

  • Hyunchul Chung
  • Vihang Errunza

Abstract

We attempt to answer the following questions: What are the revaluation effects and the impact on performance, volatility, and return correlation from stock market liberalization in emerging markets? These questions have been studied extensively at the market-level but not at the firm level. Our results show significantly different impact of stock market liberalization across firms. Large firms tend to exhibit large revaluation effects, insignificant change in performance, large declines in volatility, and insignificant change in correlation from liberalization. Small firms show small revaluation effects, improved performance, smaller decline in volatility and decreases in correlation after liberalization. These results hold after controlling for movements in world stock returns, concurrent economic reforms and macroeconomic fundamentals. They are also robust to the length of the liberalization window. Our results have important implications for international investors seeking to manage their global exposure as well as for policy makers considering capital market liberalization. Nous étudions les questions suivantes: Quels sont les effets de réévaluation et l'impact sur les performances, la volatilité et les corrélations de la libéralisation du marché boursier dans les marchés naissants? Ces questions ont été étudiées intensivement au niveau des marchés mais pas au niveau des entreprises. Nos résultats montrent que l'impact de la libéralisation des marchés est significativement différent selon la taille des entreprises. Les grandes entreprises présentent en général des effets de réévaluation importants, des changements insignifiants au niveau des performances, des chutes importantes de volatilité et des changements insignifiants des corrélations en raison de la libéralisation. Les petites entreprises présentent quant à elles de faibles effets de réévaluation, une amélioration des performances, un déclin plus faible de la volatilité et une diminution des corrélations à la suite de la libéralisation. Ces résultats demeurent valables lorsqu'on contrôle pour les mouvements des rendements boursiers mondiaux, les réformes économiques concourantes et les principes fondamentaux de macro-économie. Ils sont également robustes à la longueur de la fenêtre de libéralisation. Nos résultats ont des implications importantes pour les investisseurs internationaux qui cherchent à gérer leur exposition globale ainsi que pour les responsables qui envisagent la libéralisation de marchés financiers.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-13.

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Date of creation: 01 Apr 2003
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Handle: RePEc:cir:cirwor:2003s-13

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Keywords: Emerging Markets; Volatility; Correlation; Performance; Revaluation Effects; Marchés naissants; volatilité; corrélation; performance; effets de réévaluation;

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References

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  1. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," William Davidson Institute Working Papers Series 79, William Davidson Institute at the University of Michigan.
  2. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  3. Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
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  8. Bailey, Warren & Chung, Y. Peter & Kang, Jun-koo, 1999. "Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 489-511, December.
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  13. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
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  15. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
  16. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
  17. Errunza, Vihang, 2001. "Foreign Portfolio Equity Investments, Financial Liberalization, and Economic Development," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 703-26, November.
  18. Chuhan, Punam & DEC, 1994. "Are institutional investors an important source of portfolio investment in emerging markets?," Policy Research Working Paper Series 1243, The World Bank.
  19. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
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Cited by:
  1. Dvorak, Tomas & Podpiera, Richard, 2005. "European Union enlargement and equity markets in accession countries," Working Paper Series 0552, European Central Bank.

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