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Equity Market Liberalization, Industry Growth And The Cost Of Capital

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  • Zhen Li

    (Department of Economics and Management, Albion College)

Abstract

This paper examines whether equity market liberalization facilitates economic growth at the industry level. It also explores whether equity market liberalization reduces the cost of capital by scrutinizing a particular mechanism: that liberalization reduces the wedge between the costs of external and internal capital to firms. Using industry-level data on 19 emerging markets and 18 developed countries for the period between 1980-2000, we find a uniform increase in the growth rate of real value added across industries following liberalization in emerging markets. Industries highly dependent on external finance grow faster in liberalized regimes. No additional growth effects are found for industries dependent more on equity finance in emerging markets.

Suggested Citation

  • Zhen Li, 2010. "Equity Market Liberalization, Industry Growth And The Cost Of Capital," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 35(3), pages 103-121, September.
    • Handle: RePEc:jed:journl:v:35:y:2010:i:3:p:103-121
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    References listed on IDEAS

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    1. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    2. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    3. Nandini Gupta & Kathy Yuan, 2003. "Financial Dependence, Stock Market Liberalizations, and Growth," William Davidson Institute Working Papers Series 2003-562, William Davidson Institute at the University of Michigan.
    4. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2001. "Emerging equity markets and economic development," Journal of Development Economics, Elsevier, vol. 66(2), pages 465-504, December.
    5. Kaminsky, Graciela Laura & Schmukler, Sergio L., 2002. "Short-run pain, long-run gain : the effects of financial liberalization," Policy Research Working Paper Series 2912, The World Bank.
    6. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    7. Kim, E Han & Singal, Vijay, 2000. "Stock Market Openings: Experience of Emerging Economies," The Journal of Business, University of Chicago Press, vol. 73(1), pages 25-66, January.
    8. repec:bla:jfinan:v:59:y:2004:i:3:p:1295-1324 is not listed on IDEAS
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    Cited by:

    1. Aida Caldera Sánchez & Filippo Gori, 2016. "Can Reforms Promoting Growth Increase Financial Fragility?: An Empirical Assessment," OECD Economics Department Working Papers 1340, OECD Publishing.
    2. Michael A. Hitt & David G. Sirmon & Yuan Li & Abby Ghobadian & Jean-Luc Arregle & Kai Xu, 2021. "Institutions, industries and entrepreneurial versus advantage-based strategies: how complex, nested environments affect strategic choice," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(1), pages 147-188, March.
    3. Shafaai, Shafizal & Masih, Mansur, 2013. "Determinants of cost of equity: The case of Shariah-compliant Malaysian firms," MPRA Paper 62364, University Library of Munich, Germany.
    4. Zhen Li, 2012. "On The Growth Effects Of Equity Market Liberalization," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 37(2), pages 59-77, June.

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    More about this item

    Keywords

    Equity Market Liberalization; Growth; Cost of Capital; External Finance Dependence;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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