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

The Quality Effect : Does Financial Liberalization Improve the Allocation of Capital?
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Volume/Issue:
2004/112
Series:
IMF Working Papers
Author(s):
Abdul Abiad, Nienke Oomes, and Kenichi Ueda
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
June 2004
DOI:
http://dx.doi.org/10.5089/9781451853636.001
ISBN:
9781451853636
ISSN:
1018-5941
Page:
35
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.
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