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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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  • Anusha Chari
  • Peter Blair Henry

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10318.

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Date of creation: Feb 2004
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Handle: RePEc:nbr:nberwo:10318

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Cited by:
  1. 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.
  2. Flavin, Thomas & O'Connor, Thomas, 2010. "The sequencing of stock market liberalization events and corporate financing decisions," Emerging Markets Review, Elsevier, vol. 11(3), pages 183-204, September.
  3. Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.
  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.
  5. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Patterns of international capital raisings," Policy Research Working Paper Series 4687, The World Bank.
  6. 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).
  7. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
  8. Anusha Chari & Peter Blair Henry, 2002. "Risk Sharing and Asset Prices: Evidence From a Natural Experiment," NBER Working Papers 8988, National Bureau of Economic Research, Inc.
  9. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  10. Kristin J. Forbes, 2007. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 171-202 National Bureau of Economic Research, Inc.
  11. Papaioannou, Elias, 2007. "Finance and growth: a macroeconomic assessment of the evidence from a European angle," Working Paper Series 0787, European Central Bank.
  12. Ziv Chinzara & Radhika Lahiri & En Te chen, 2012. "Financial Globalisation and Sectoral Reallocation of Capital in South Africa," School of Economics and Finance Discussion Papers and Working Papers Series 286, School of Economics and Finance, Queensland University of Technology.
  13. Mitton, Todd, 2006. "Stock market liberalization and operating performance at the firm level," Journal of Financial Economics, Elsevier, vol. 81(3), pages 625-647, September.

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