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The Quality Effect

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Author Info

  • Abdul Abiad
  • Nienke Oomes
  • Kenichi Ueda

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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/112.

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Length: 35
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/112

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Keywords: Capital; Credit; Financial systems; Emerging markets; Forecasting models; financial liberalization; stock market; financial deepening; stock market turnover; stock market capitalization; bond; financial sector; financial markets; reserve requirements; financial reforms; stock markets; international finance corporation; interest rate controls; international finance; capital adequacy; financial repression; financial reform; financial economics; corporate bond; stock market liquidity; stock market development; financial intermediation; financial institutions; bond rates; interest rate liberalization; currency crisis; deposit rates; moral hazard; stock exchange; interest rate ceilings; banking crisis; financial integration; capital account liberalization; stock price; credit booms; partial derivatives; financial information; financial crises; equity markets; financial fragility; recession; bank nationalization; domestic financial institutions; financial instruments; accounting standards; financial system; stock prices; financial structures;

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References

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  1. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 98, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
  3. Francis E. Warnock & Hali J. Edison, 2001. "A Simple Measure of the Intensity of Capital Controls," IMF Working Papers 01/180, International Monetary Fund.
  4. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 639-70, August.
  5. Arturo Galindo & Fabio Schiantarelli & Andrew Weiss, 2002. "Does Financial Liberalization Improve the Allocation of Investment?: Micro Evidence from Developing Countries," IDB Publications 6496, Inter-American Development Bank.
  6. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1320, Econometric Society.
  7. Michael B. Devereux & Gregor W. Smith, 1991. "International Risk Sharing and Economic Growth," Working Papers, Queen's University, Department of Economics 829, Queen's University, Department of Economics.
  8. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  9. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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  11. Booth, L. & Asli Demirgu-Kunt, V.A. & Maksimovic, V., 1999. "Capital Structure in Developing Countries," Rotman School of Management - Finance, Rotman School of Management, University of Toronto 00-001, Rotman School of Management, University of Toronto.
  12. repec:fth:wobaco:1083 is not listed on IDEAS
  13. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  14. Anusha Chari (Chicago) & Peter Henry (Stanford), 2004. "The Invisible Hand in Emerging Markets," Econometric Society 2004 North American Winter Meetings, Econometric Society 629, Econometric Society.
  15. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 58(1-2), pages 187-214.
  16. Kenichi Ueda, 2000. "Increasing Returns, Long-Run Growth and Financial Intermediation," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1545, Econometric Society.
  17. Cho, Yoon Je, 1988. "The effect of financial liberalization on the efficiency of credit allocation : Some evidence from Korea," Journal of Development Economics, Elsevier, Elsevier, vol. 29(1), pages 101-110, July.
  18. Ashoka Mody & Abdul Abiad, 2005. "Financial Reform," IMF Economic Issues 35, International Monetary Fund.
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