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Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries

Author

Listed:
  • Arturo Galindo
  • Fabio Schiantarelli

    () (Boston College)

  • Andrew Weiss

    (Boston University)

Abstract

Using firm level panel data from twelve developing countries we explore if financial liberalization improves the efficiency with which investment funds are allocated. A summary index of the efficiency of investment allocation that measures whether investment funds are going to firms with a higher marginal return to capital is developed. We examine the relationship between this and various measures of financial liberalization and find that liberalization increases the efficiency with which investment funds are allocated. This holds after various robustness checks and is consistent with firm level evidence that a stronger association between investment and fundamentals after financial liberalization.

Suggested Citation

  • Arturo Galindo & Fabio Schiantarelli & Andrew Weiss, 2005. "Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries," Boston College Working Papers in Economics 625, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:625
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    References listed on IDEAS

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    Keywords

    financial liberalization; investment; efficiency; reform; development;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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