Working Paper: NBER ID: w27305
Authors: Xin Liu; Shangjin Wei; Yifan Zhou
Abstract: The opening of equity markets to foreign investment appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad, 2005) in spite of a relatively small role of such markets for financing investment in most economies. We propose a possible spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium is an important mechanism.
Keywords: equity market liberalization; bank loans; QFII program; spillover effect; risk premium
JEL Codes: F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| QFII program (G23) | equity prices increase (G12) |
| equity prices increase (G12) | loan prices decrease (E43) |
| reduction in risk premium (G19) | loan costs decrease (G21) |
| reduction in risk premium (G19) | investment increase (E22) |
| reduction in risk premium (G19) | hiring increase (J23) |
| QFII program (G23) | return on assets increase (G32) |