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,

University. We are especially grateful for suggestions from Geert Bekaert, Bob Hodrick, and Ken Singleton. We also thank an anonymous referee whose comments and suggestions greatly improved the paper.

This paper examines the impact of foreign investors on stock returns in Korea from November 30, 1996 to the end of 1997 using order and trade data. We "nd strong evidence of positive feedback trading and herding by foreign investors before the period of Korea's economic crisis. During the crisis period, herding falls, and positive feedback trading by foreign investors mostly disappears. We "nd no evidence that trades by foreign investors had a destabilizing e!ect on Korea's stock market over our sample period. In particular, the market adjusted quickly and e$ciently to large sales by foreign investors, and these sales were not followed by negative abnormal returns. � 1999

Outside the U.S. and the U.K., large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries ’ economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance – affecting rates of innovation, economy-wide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to

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: We aim to provide insight into the observed equity home bias phenomenon by analyzing the determinants of U.S. holdings of equities across a wide range of countries. In particular, we explore the role of information costs in determining the country distribution of U.S. investors' equity holdings using a comprehensive new data set on U.S. ownership of foreign stocks. We find that U.S. holdings of a country's equities are positively related to the share of that country's stock market that is listed on U.S. exchanges, even after controlling for capital controls, trade links, transaction costs, and historical risk-adjusted returns. We attribute this finding to the fact that foreign firms that list on U.S. exchanges are obliged to provide standardized, credible financial information, thereby reducing information costs incurred by U.S. investors. This obligation stems from U.S. investor protection regulations, which include stringent disclosure requirements, reconciliation of financial stat...

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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.

Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.

Contagion in equity markets refers to the notion that markets move more closely together during periods of crisis. One of the most interesting aspects of the contagion debate is the disagreement