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The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?

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Author Info
Abdul Abiad
Nienke Oomes
Kenichi Ueda

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

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Length: 34 pages
Date of creation: 20 Jul 2004
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Handle: RePEc:imf:imfwpa:04/112

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Related research
Keywords: Capital ; India ; Jordan ; Korea; Republic of ; Malaysia ; Thailand ; Investment ; Credit ; Financial systems ; Emerging markets ; Forecasting models ;

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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. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  2. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  4. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300. [Downloadable!] (restricted)
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  5. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214. [Downloadable!] (restricted)
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  6. Hali J. Edison & Francis E. Warnock, 2001. "A simple measure of the intensity of capital controls," International Finance Discussion Papers 708, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August. [Downloadable!] (restricted)
  8. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  9. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August. [Downloadable!] (restricted)
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  10. Anusha Chari (Chicago) & Peter Henry (Stanford), 2004. "The Invisible Hand in Emerging Markets," Econometric Society 2004 North American Winter Meetings 629, Econometric Society.
  11. Kenichi Ueda, 2000. "Increasing Returns, Long-Run Growth and Financial Intermediation," Econometric Society World Congress 2000 Contributed Papers 1545, Econometric Society. [Downloadable!]
  12. Steve Bond & Jason Cummins, 2001. "Noisy share prices and the Q model of investment," IFS Working Papers W01/22, Institute for Fiscal Studies. [Downloadable!]
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  13. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04. [Downloadable!] (restricted)
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Full references

Cited by:
(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. Robert M. Townsend & Kenichi Ueda, 2007. "Welfare Gains from Financial Liberalization," IMF Working Papers 07/154, International Monetary Fund. [Downloadable!]
  2. 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)
    Other versions:
  3. Hermes, Niels & Lensink, Robert, 2005. "Does Financial Liberalization Influence Saving, Investment and Economic Growth? Evidence from 25 Emerging Market Economies, 1973-96," Working Papers RP2005/69, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. Wei Huang, 2006. "Emerging Markets, Financial Openness and Financial Development," Bristol Economics Discussion Papers 06/588, Department of Economics, University of Bristol, UK. [Downloadable!]
  5. Monzur Hossain, 2008. "Currency Regime Choice: A Survey of Empirical Literature," AIUB Bus Econ Working Paper Series AIUB-BUS-ECON-2008-11, American International University-Bangladesh, Office of Research and Publications (ORP), revised Apr 2008. [Downloadable!]
  6. Sikandar Hussain & M. Shahid Ebrahim, 2005. "Financial Development and Property Valuation," Computing in Economics and Finance 2005 24, Society for Computational Economics. [Downloadable!]
  7. Monzur Hossain, 2008. "Exchange Rate Regime Transition Dynamics In East Asia," AIUB Bus Econ Working Paper Series AIUB-BUS-ECON-2008-03, American International University-Bangladesh, Office of Research and Publications (ORP), revised Jan 2008. [Downloadable!]
  8. Thierry Tressel & Enrica Detragiache, 2008. "Do Financial Sector Reforms Lead to Financial Development? Evidence from a New Dataset," IMF Working Papers 08/265, International Monetary Fund. [Downloadable!]
  9. George von Furstenberg & Ulf von Kalckreuth, 2007. "Dependence on External Finance by Manufacturing Sector: Examining the Measure and its Properties," Caepr Working Papers 2007-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
    Other versions:
  10. Eric Van Tassel & Sharmila Vishwasrao, 2006. "Asymmetric Information and the Mode of Entry In Foreign Credit Markets," Working Papers 06002, Department of Economics, College of Business, Florida Atlantic University. [Downloadable!]
    Other versions:
  11. Stijn Claessens & Kenichi Ueda, 2008. "Banks and Labor as Stakeholders: Impact on Economic Performance," IMF Working Papers 08/229, International Monetary Fund. [Downloadable!]
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