A Liberalization Spillover: From Equities to Loans
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 loan- and firm-level 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.
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Document Object Identifier (DOI): 10.3386/w27305