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

Abdul Abiad, Nienke Oomes and Kenichi Ueda

No 2004/112, IMF Working Papers from International Monetary Fund

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: WP; financial liberalization; bank credit; dependent variable; liberalization index; Tobin’s Q; investment; allocative efficiency; inequality; liberalization subcomponent; credit allocation; inflation rate; production function; liberalization date; stock market capitalization; book value; liberalization exercise; Stock markets; Inflation; Credit; Market capitalization; Financial sector; East Asia; Global (search for similar items in EconPapers)
Pages: 35
Date: 2004-06-01
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Citations: View citations in EconPapers (35)

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Journal Article: The quality effect: Does financial liberalization improve the allocation of capital? (2008)
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