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Is the Invisible Hand Discerning or Indiscriminate? Investment and Stock Prices in the Aftermath of Capital Account Liberalizations

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Author Info
Henry, Peter B. (Stanford U)
Chari, Anusha (U of Michigan)

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Abstract

We confront the two opposing views of capital account liberalization in developing countries with a new firm-level dataset on investment, stock prices, and sales. In the three-year period following liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. The return to capital rises in the post-liberalization period, suggesting that the investment boom does not constitute a wasteful binge. In the cross section, changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm's expected future cash flow predicts a 4.1-percentage point increase in its investment; the country-specific shock to the cost of capital predicts a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1839.

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Date of creation: Jan 2004
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Handle: RePEc:ecl:stabus:1839

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Patterns of international capital raisings," Policy Research Working Paper Series 4687, The World Bank. [Downloadable!]
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  2. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  3. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Geert Bekaert & Campbell R. Harvey & Christian Lundblad & Stephan Siegel, 2004. "Global Growth Opportunities and Market Integration," NBER Working Papers 10990, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Knill, April M., 2005. "Taking the bad with the good : volatility of foreign portfolio investment and financial constraints of small firms," Policy Research Working Paper Series 3797, The World Bank. [Downloadable!]
  6. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund. [Downloadable!]
  7. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3). [Downloadable!] (restricted)
  8. Elias Papaioannou, 2007. "Finance and growth - a macroeconomic assessment of the evidence from a European angle," Working Paper Series 787, European Central Bank. [Downloadable!]
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