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

35 Pages Posted: 15 Feb 2006

See all articles by Abdul G. Abiad

Abdul G. Abiad

International Monetary Fund (IMF) - Research Department

Nienke Oomes

International Monetary Fund (IMF)

Kenichi Ueda

University of Tokyo - Faculty of Economics

Multiple version iconThere 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

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, Vol. , pp. 1-35, 2004. Available at SSRN: https://ssrn.com/abstract=878936

Abdul G. Abiad (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Nienke Oomes

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kenichi Ueda

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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