The Invisible Hand in Emerging Markets
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.
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