A Liberalization Spillover: From Equities to Loans

58 Pages Posted: 9 Jun 2020 Last revised: 11 Aug 2022

See all articles by Xin Liu

Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Yifan Zhou

FISF, Fudan University

Date Written: June 2020

Abstract

The opening of equity markets to foreign investment appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad, 2005) in spite of a relatively small role of such markets for financing investment in most economies. We propose a possible spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium is an important mechanism.

Suggested Citation

Liu, Xin and Wei, Shang-Jin and Zhou, Yifan, A Liberalization Spillover: From Equities to Loans (June 2020). NBER Working Paper No. w27305, Available at SSRN: https://ssrn.com/abstract=3621810

Xin Liu (Contact Author)

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University ( email )

Kingsley Street
acton, ACT 0200
Australia

Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yifan Zhou

FISF, Fudan University ( email )

220 Handan Road
Yangpu District
Shanghai, 200051
China

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