The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
IMF Working Paper No. 04/112
50 Pages Posted: 6 Feb 2005
There are 2 versions of this paper
The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
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
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