Working Paper: NBER ID: w10990
Authors: Geert Bekaert; Campbell R. Harvey; Christian Lundblad; Stephan Siegel
Abstract: We measure a country's growth opportunities by investigating how its industry mix is priced in global capital markets, using price earnings ratios of global industry portfolios. We derive three sets of empirical results. First, these exogenous growth opportunities strongly predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. Second, we re-examine the link between financial development, investor protection, capital allocation, and growth. We find that financial development and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Third, we formulate new tests of market integration and segmentation. Under integration, the difference between a country's local PE ratio and its global counterpart should not predict relative growth, but the difference between its "exogenous" global PE ratio and the world market PE ratio should predict relative growth.
Keywords: No keywords provided
JEL Codes: F30; F36; G15; O11; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous growth opportunities (O36) | future changes in real GDP (O49) |
| exogenous growth opportunities (O36) | future changes in investment (G31) |
| financial openness (F30) | predictive relationship between growth opportunities and actual growth outcomes (O40) |
| local PE ratio difference (G19) | relative growth (O40) |
| global PE ratio difference (F62) | relative growth (O40) |
| global growth opportunities (F01) | actual growth outcomes (O40) |
| financial liberalization (F30) | growth opportunities (O36) |