Essays on capital liberalization and stock market development in emerging market economies

Vivekanand Jayakumar, Purdue University

Abstract

This dissertation examines different aspects of capital liberalization and its impact on local stock market development. Specifically, it considers the consequences of opening local stock markets to foreign investors and the effects of allowing local companies to access foreign stock markets. The first chapter provides a thorough and in-depth examination of the consequences of allowing foreign investors direct access to domestic stock markets. By using capital liberalization measures that are specifically relevant to international equity investors, and by taking into account variations in the extent of liberalization (across countries and over time), we attempt to unearth the effects of foreign investor participation on local stock market size and liquidity (as well as on qualitative aspects of market development). Using cross-country and panel data regression models, we find that there is some evidence of a positive impact on the size and liquidity of stock markets from equity market liberalization. Though the results from the cross-country analysis are somewhat affected by the time period considered, the panel analysis provide more robust support for our conclusions. We also indicate the possibility of qualitative improvements to stock markets in the presence of foreign investors. The second chapter focuses on the effects to local stock markets from extending indirect access to foreign equity investors. We examine the impact of international cross-listings on local stock exchanges by focusing on the experience of Chile. First, we analyze the consequences to the domestically traded shares of a sample of Chilean companies that undertook ADR listings. Our findings show that there is no indication of order-flow migration from the domestic market following cross-listings. There is, however, evidence that in the aftermath of cross-listings trading becomes concentrated in the ADR market. There is also some indication of an increase in the base-level price volatility of the underlying stock series following cross-listings. Second, we study the changes in Chile's local stock market vis-à-vis the ADR market. We observe that the increase in the size and liquidity of the domestic stock exchange is overshadowed by the rapid growth of the ADR market.

Degree

Ph.D.

Advisors

Carlson, Purdue University.

Subject Area

Finance

COinS