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Firm-Specific Information and the Efficiency of Investment

  • Chari, Anusha

    (U of Michigan)

  • Henry, Peter B.

    (Stanford U)

We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional 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 sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict 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 Stanford University, Graduate School of Business in its series Research Papers with number 1930.

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Date of creation: Apr 2006
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Handle: RePEc:ecl:stabus:1930
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