Stock Market Liberalization and Innovation
58 Pages Posted: 2 Mar 2014 Last revised: 19 Apr 2018
Date Written: April 9, 2018
We investigate the effect of stock market liberalization on technological innovation. Using a sample of 20 economies that experience stock market liberalization, we find that these economies exhibit a higher level of innovation output after liberalization, and this effect is disproportionately stronger in more innovative industries. The relaxation of financial constraints (the financing channel) and enhanced risk-sharing between domestic and foreign investors (the risk-sharing channel) are two plausible mechanisms that allow stock market liberalization to promote innovation. We, however, do not find supportive evidence for the corporate governance channel. Finally, we show that technological innovation is a mechanism through which stock market liberalization affects economic growth. Our paper provides new insights into the real effects of stock market liberalization on growth and on the economy.
Keywords: stock market liberalization; innovation; equity financing; risk-sharing
JEL Classification: G15, O30, F63
Suggested Citation: Suggested Citation