Working Paper: NBER ID: w10064
Authors: Peter Blair Henry; Peter Lombard Lorentzen
Abstract: Contrary to the predictions of standard economic theory, capital market liberalization has been a mixed blessing for many countries. Liberalization of debt inflows exposes economies to the risk of crises stemming from sudden changes in investor sentiment. Equity market liberalizations, on the other hand, have promoted growth in almost every liberalizing country. Yet equity market liberalizations have not had as strong an effect as might be expected. To convince outsiders to invest, countries must put in place laws and supporting institutions to protect the rights of minority shareholders. Countries with such protections tend to have larger, more efficient, and more stable stock markets than those that do not.
Keywords: capital market liberalization; equity market; debt market; developing countries; investor protection
JEL Codes: F3; O1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity market liberalization (G18) | decrease in the cost of capital (G31) |
| decrease in the cost of capital (G31) | promotes investment (O16) |
| promotes investment (O16) | economic growth (O49) |
| equity market liberalization (G18) | economic growth (O49) |
| stronger laws protecting minority shareholders (G34) | larger, more stable equity markets (G10) |
| liberalization of debt markets (F65) | financial crises (G01) |
| effective investor protection laws (G18) | attracting foreign capital (F21) |