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Financial Dependence, Stock Market Liberalizations, and Growth

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  • Nandini Gupta

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  • Kathy Yuan

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Abstract

Stock market liberalizations provide a natural experiment to test for the causal relation between financial development and economic growth. We test this relation by investigating whether liberalizations facilitate growth through the particular mechanism of reducing capital market imperfections that drive a wedge between the external and internal cost of capital to firms. Using panel data on a large sample of emerging markets, we find no evidence of a uniform shift across all sectors in average industry growth following liberalization. Instead, consistent with the hypothesis that liberalizations lower the incremental cost of external capital, it appears that industries that depend more on external finance experience significantly higher growth following liberalization. We also find that growth occurs through the creation of new establishments, which is more likely to require external funds, rather than through an expansion in the average size of existing establishments, which firms are more likely to finance with internal cash. These results are robust to alternative hypotheses, country and industry specific controls, other economic reforms, world business cycle e ects, and contemporaneous macroeconomic shocks.

Suggested Citation

  • Nandini Gupta & Kathy Yuan, 2003. "Financial Dependence, Stock Market Liberalizations, and Growth," William Davidson Institute Working Papers Series 2003-562, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2003-562
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    Cited by:

    1. Zhen Li, 2010. "Equity Market Liberalization, Industry Growth And The Cost Of Capital," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 35(3), pages 103-121, September.
    2. Ozkok, Zeynep, 2012. "Financial Harmonization and Industrial Growth: Evidence from Europe," MPRA Paper 58875, University Library of Munich, Germany, revised 25 Sep 2014.
    3. Zeynep Ozkok, 2016. "Financial Harmonization and Financial Development: An Application of Europe’s Financial Services Action Plan," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 62(1), pages 1-35.

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