The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
June 1, 2004
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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.
Subject: Credit, Economic sectors, Financial markets, Financial sector, Inflation, Market capitalization, Money, Prices, Stock markets
Keywords: allocative efficiency, bank credit, book value, Credit, credit allocation, dependent variable, East Asia, financial liberalization, Financial sector, Global, inequality, Inflation, inflation rate, investment, liberalization date, liberalization exercise, liberalization index, liberalization subcomponent, Market capitalization, production function, stock market capitalization, Stock markets, Tobin’s Q, WP
Pages:
35
Volume:
2004
DOI:
Issue:
112
Series:
Working Paper No. 2004/112
Stock No:
WPIEA1122004
ISBN:
9781451853636
ISSN:
1018-5941
