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The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?

  • Abdul Abiad
  • Nienke Oomes
  • Kenichi Ueda

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/112.

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Length: 35
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/112
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  10. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
  11. Francis E. Warnock & Hali J. Edison, 2001. "A Simple Measure of the Intensity of Capital Controls," IMF Working Papers 01/180, International Monetary Fund.
  12. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," American Economic Review, American Economic Association, vol. 92(2), pages 198-204, May.
  13. Arturo Galindo & Fabio Schiantarelli & Andrew Weiss, 2002. "Does Financial Liberalization Improve the Allocation of Investment?: Micro Evidence from Developing Countries," IDB Publications (Working Papers) 6496, Inter-American Development Bank.
  14. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
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  19. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
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  21. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
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  23. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
  24. 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.
  25. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  26. Ashoka Mody & Abdul Abiad, 2005. "Financial Reform: What Shakes It? What Shapes It?," IMF Economic Issues 35, International Monetary Fund.
  27. Cemile Sancak, 2002. "Financial Liberalization and Real Investment: Evidence From Turkish Firms," IMF Working Papers 02/100, International Monetary Fund.
  28. Kenichi Ueda, 2000. "Increasing Returns, Long-Run Growth and Financial Intermediation," Econometric Society World Congress 2000 Contributed Papers 1545, Econometric Society.
  29. Kenichi Ueda, 2006. "Banks As Coordinators of Economic Growth," IMF Working Papers 06/264, International Monetary Fund.
  30. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
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