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The Invisible Hand in Emerging Markets

Author

Listed:
  • Anusha Chari (Chicago)
  • Peter Henry (Stanford)

Abstract

We present the first firm-level analysis of stock market liberalization on investment. In the year that an emerging economy liberalizes, the growth rate of its typical firm^Òs capital stock exceeds the pre-liberalization mean by 4.1 percentage points. In each of the next three years the average growth rate of the capital stock for the 369 firms in our five-country sample exceeds its pre-liberalization mean by 6.1 percentage points. While liberalization leads to an increase in average investment, there is no evidence that the firm-specific differences in the post-liberalization investment increases are driven by firm-specific variation in changes in the cost of capital or investment opportunities. In other words, in the aftermath of stock market liberalizations, the invisible hand allocates more capital to emerging market firms, but it appears to do so in a somewhat indiscriminate manner.

Suggested Citation

  • Anusha Chari (Chicago) & Peter Henry (Stanford), 2004. "The Invisible Hand in Emerging Markets," Econometric Society 2004 North American Winter Meetings 629, Econometric Society.
    • Handle: RePEc:ecm:nawm04:629
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    Citations

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    Cited by:

    1. Sikandar Hussain & M. Shahid Ebrahim, 2005. "Financial Development and Property Valuation," Computing in Economics and Finance 2005 24, Society for Computational Economics.
    2. Abiad, Abdul & Oomes, Nienke & Ueda, Kenichi, 2008. "The quality effect: Does financial liberalization improve the allocation of capital?," Journal of Development Economics, Elsevier, vol. 87(2), pages 270-282, October.

    More about this item

    Keywords

    stock market liberalization; emerging markets;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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