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The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?

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  • The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
  • Abiad, Abdul; Oomes, Nienke; Ueda, Kenichi
  • International Monetary Fund (IMF)


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Title The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
Similar Titles
Material Type Reports
Author(English)

Abiad, Abdul; Oomes, Nienke; Ueda, Kenichi

Publisher

International Monetary Fund (IMF)

Date 2004
Pages 34
Language English
File Type Link
Subject Economy < Trade

Abstract

The study documents evidence of a "quality effect" of financial liberalization on allocative efficiency, which is measured by the dispersion in Tobin's Q across firms. Based on a simple model, the authors predict that financial liberalization, by equalizing access to credit, reduces the variation in expected marginal returns. They test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. They find strong evidence that financial liberalization, rather than financial deepening, improves allocative efficiency.