Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation

Forthcoming, Journal of Finance

58 Pages Posted: 8 Nov 2012 Last revised: 17 Oct 2016

See all articles by Mauricio Larrain

Mauricio Larrain

Columbia University

Sebastian Stumpner

University of Montreal - Department of Economics

Date Written: August 22, 2016

Abstract

We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in ten Eastern European countries. Using a large firm-level dataset, we show that capital account liberalization decreases the dispersion of the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially-constrained firms to demand more capital and produce at a more efficient level. Finally, we use a model of misallocation and document that capital account liberalization increases aggregate productivity through a more efficient firm capital allocation by 10% to 16%.

Suggested Citation

Larrain, Mauricio and Stumpner, Sebastian, Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation (August 22, 2016). Forthcoming, Journal of Finance. Available at SSRN: https://ssrn.com/abstract=2172349 or http://dx.doi.org/10.2139/ssrn.2172349

Mauricio Larrain (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Sebastian Stumpner

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

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