We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The effect is robust to alternative definitions of liberalization and does not reflect a business cycle effect. The channel of growth is both increased investment post liberalization which partially reflects a decreased cost of capital and increased factor productivity. The additional investment is largely financed by foreign capital leading to deteriorating trade balances. Some of the liberalization effect can be accounted for by coincidental macroeconomic reforms as well as financial development. However, our analysis shows that even after controlling for a broad range of variables, a statistically significant and economically important role is played by equity market liberalization. We appreciate the helpful comments of Wayne Ferson, Peter Henry, Ross Levine, Graciela Kaminsky,

We present a model of the effects of legal protection of minority shareholders and of cash-flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies.

The distance between small firms and their lenders is increasing, and they are communicating in more impersonal ways. After documenting these systematic changes, we demonstrate they do not arise from small firms locating differently, consolidation in the banking industry, or biases in the sample. Instead, improvements in lender productivity appear to explain our findings. We also find distant firms no longer have to be the highest quality credits, indicating they have greater access to credit. The evidence indicates there has been substantial development of the financial sector, even in areas such as small business lending.

Abstract We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) ''crime and punishment'' framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection. r

Journal of Economic

Data on corporate governance and disclosure practices reveal wide within-country variation that decreases with the strength of investors ’ legal protection. A simple model identifies three firm attributes related to that variation: investment oppor-tunities, external financing, and ownership structure. Using firm-level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All rela-tions are stronger in less investor-friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices. PREVIOUS STUDIES SHOW THAT BETTER LEGAL PROTECTION for investors is associated with higher valuation of the stock market (La Porta et al. (2002)), higher valuation of listed firms relative to their assets or changes in investments (Wurgler (2000)), and larger listed firms in terms of their sales and assets (Kumar, Rajan, and Zingales (1999)). Furthermore, industries and firms in better legal regimes rely more on external financing to fund their growth

Abstract not found

We examine the short- and long-run effects of financial liberalization on capital markets. To do so, we construct a new comprehensive chronology of financial liberalization in 28 developed and emerging economies since 1973. We also construct an algorithm to identify booms and busts in stock market prices. Our results indicate that financial liberalization is followed by more pronounced boom-bust cycles in the short run. However, financial liberalization leads to more stable markets in the long run. Finally, we analyze the sequencing of liberalization and institutional reforms to understand the contrasting short- and long-run effects of liberalization.

participants at the Georgia Tech Conference on International Finance. This paper uses religion and language as proxies for culture and investigates how these proxies are related to investor rights. We find that a country’s principal religion helps predict the cross-sectional variation in creditor rights better than a country’s openness to international trade, its language, its income per capita, or the origin of its legal system. Catholic countries protect the rights of creditors less than other countries and have less private long-term debt. A country’s openness to international trade mitigates the influence of religion on creditor rights. Our culture proxies are also important predictors of how countries enforce rights, but they have little correlation with shareholder rights. 1 See Levine (1997) for a review of the literature. 1 “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all of the difference.” Landes (2000)

We develop a framework for conceptualizing and measuring corporate transparency at the country level. We perform factor analysis to explore the structure underlying the measures of countries ’ firm-specific information environments from our transparency framework. Our factor analysis isolates two factors. The first factor, interpreted as financial transparency, primarily captures the intensity and timeliness of financial disclosures, and their interpretation and dissemination by analysts and the media. The second factor, interpreted as governance transparency, primarily captures the intensity of governance disclosures (the identity, remuneration, and shareholdings of officers and directors, identity and holdings of other major shareholders) and, to a lesser extent, the intensity and timeliness of financial disclosures. We estimate multivariate, cross-country regressions to investigate hypothesized determinants of the financial and governance transparency factors. Our results suggest that, after controlling for the general level of economic development as measured by per capita GNP, financial transparency is lower in countries characterized by high risk of expropriation of the firms ’ assets or profits by the State, consistent with firms suppressing the availability of financial