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

Abiad, Abdul G.; Oomes, Nienke; Ueda, Kenichi

doi:10.2139/ssrn.661821

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

IMF Working Paper No. 04/112

50 Pages Posted: 6 Feb 2005

See all articles by Abdul G. Abiad

Abdul G. Abiad

International Monetary Fund (IMF) - Research Department

Kenichi Ueda

University of Tokyo - Faculty of Economics

There are 2 versions of this paper

Date Written: June 2004

Abstract

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.

Keywords: Tobin's Q, financial liberalization, investment, allocative efficiency, inequality

JEL Classification: D61, E44, G14, G18, O16

Suggested Citation: Suggested Citation

Abiad, Abdul G. and Oomes, Nienke and Ueda, Kenichi, The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital? (June 2004). IMF Working Paper No. 04/112, Available at SSRN: https://ssrn.com/abstract=661821 or http://dx.doi.org/10.2139/ssrn.661821