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

Author/Editor: Abiad, Abdul ; Oomes, Nienke ; Ueda, Kenichi
Publication Date: June 01, 2004
Electronic Access: Free Full text (PDF file size is 514KB).
Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 04/112
Subject(s): Capital | India | Jordan | Korea, Republic of | Malaysia | Thailand | Investment | Credit | Financial systems | Emerging markets | Forecasting models

Author's Keyword(s): Tobin's Q | financial liberalization | investment | allocative efficiency | inequality
Publication Date: June 01, 2004
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA1122004 Pages: 34
US$15.00 (Academic Rate:
US$15.00 )
Please address any questions about this title to