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The quality effect: Does financial liberalization improve the allocation of capital?

  • Abiad, Abdul
  • Oomes, Nienke
  • Ueda, Kenichi

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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File URL: http://www.sciencedirect.com/science/article/B6VBV-4RC2S49-1/2/993c2289d1f6f2ebdf566a5c4abacc30
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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 87 (2008)
Issue (Month): 2 (October)
Pages: 270-282

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Handle: RePEc:eee:deveco:v:87:y:2008:i:2:p:270-282
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  27. Cho, Yoon Je, 1988. "The effect of financial liberalization on the efficiency of credit allocation : Some evidence from Korea," Journal of Development Economics, Elsevier, vol. 29(1), pages 101-110, July.
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  30. Kenichi Ueda, 2000. "Increasing Returns, Long-Run Growth and Financial Intermediation," Econometric Society World Congress 2000 Contributed Papers 1545, Econometric Society.
  31. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
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