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

By Abdul d Abiad, Nienke Oomes, Kenichi Ueda

June 1, 2004

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Abdul d Abiad, Nienke Oomes, and Kenichi Ueda. The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?, (USA: International Monetary Fund, 2004) accessed September 19, 2024

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.

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

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/112
Stock No:

WPIEA1122004
ISBN:

9781451853636
ISSN:

1018-5941

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