Working Paper: NBER ID: w9481
Authors: Rodolfo Martell; Ren M. Stulz
Abstract: Equity market liberalizations are like IPOs, but they are IPOs of a country's stock market rather than of individual firms. Both are endogenous events whose benefits are limited by poor investor protection, agency costs, and information asymmetries. As for stock prices following an IPO, there are legitimate concerns about the efficiency in the period following the liberalization of the stock market returns of countries that liberalize their equity markets. Equity markets of liberalizing countries experience extremely strong performance immediately after the liberalization, but then go through a period of poor performance. This pattern of stock returns is more dramatic for countries with poorer financial development before the liberalization.
Keywords: No keywords provided
JEL Codes: F3; G14; G15; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity market liberalizations (G18) | immediate strong stock price performance (G14) |
| equity market liberalizations (G18) | poor stock price performance (G14) |
| influx of foreign investors (F21) | immediate increase in stock prices (G10) |
| poor stock price performance (G14) | overreaction to liberalization event (E65) |
| investor protection and agency costs (G24) | influence on outcomes of liberalizations (F69) |
| controlling shareholders resistance (G34) | limited benefits of liberalization (F69) |