DBJ Discussion Paper Series, No.1403

Equity Market Liberalization and Equity IssuanceDavid McLean(University of Alberta)
Jeffrey Pontiff(Boston College)
Mengxin Zhao
(University of Alberta)

June 2014

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in orderto protect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the viewsof the Institute.

Equity Market Liberalization and Equity Issuanceψ

R. David McLean, Jeffrey Pontiff, and Mengxin Zhao
This Draft: April 2, 2014

Abstract
Issuance of public equity and investment do not increase when a country liberalizes its
stock market. Similarly, at the firm-level foreigner-investability is associated with lower equity
issuance and investment. Moreover, foreign institutional ownership is low in firms that
foreigners can invest in; the median value is only 5.3% of total shares outstanding. Consistent
with confounding effects, foreign direct investment, which does not include equity investment inpublic firms, surges during and after the year a country liberalizes its equity market. Ourevidence suggests that the growth effects associated with equity market liberalization are causedby other financial and economic reforms.
JEL Codes: F30, F38, G30, G24, G15
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
ψ

A previous and substantially different version of this paper was circulated under the title “Equity market
liberalization, external finance, and fundamental volatility.” For helpful comments we thank Kathleen Hanley, Todd
Mitton, Randall Morck, Stephan Siegel, Philip Strahan, and seminar participants at the Development Bank of Japan,
Boston University, Harvard Business School, Hitotsubashi University, National University of Singapore, Shanghai
Jiao Tong University, Shanghai University of Finance and Economics, Simon Fraser University, University ofAlberta, Wilfred Laurier, and conference participants at the Financial Intermediation Research Society and the HEC
Montreal Conference. Part of this research was conducted while McLean was a Visiting Scholar at the Development
Bank of Japan. Contact information: McLean (rdmclean@ualberta.ca) is at the University of Alberta. Pontiff(pontiff@bc.edu) is at Boston College. Zhao (mengxin.zhao@ualberta.ca) is at the University of Alberta.

Many emerging market countries have had regulations that limit foreign investment andthe flow of capital across borders. During the last few decades many of these barriers have been
eliminated or reduced. In this paper we try to better understand the real and financial effects ofreducing barriers to foreign equity portfolio investment, which is commonly referred to as equity
market liberalization.
The potential benefits of equity market liberalization are that the cost of capital falls, thesupply of capital increases, and corporate governance improves. Consistent with this framework,
Bekeart and Harvey (2000), Henry (2000a and 2003), Kim and Singal (2000), and Chari andHenry (2004) provide evidence that dividend yields fall and stock prices surge during the years
following stock market liberalizations. Henry (2000) shows that private investment booms after acountry liberalizes its stock market. Mitton (2006) shows that operating efficiency is higher infirms that are investable to foreigners. Bekaert, Harvey, and Lundblad (2005 and 2010), Bekaert,
Harvey, Lundblad, and Siegel (2007), and Quinn and Toyada (2008) show that GDP growth ishigher in countries with liberalized equity markets, although they include both developed andemerging markets in their study, whereas the other aforementioned papers focus on emerging
markets.
Our research challenges the idea that these effects are caused by equity market
liberalization, and instead suggests that confounding factors play a more central role. To further
appreciate how confounding factors can affect a country that liberalized its stock market,
consider the case of Brazil. In 1991, Brazil reduced several barriers to foreign direct investment(Shatz, 2000; Desai, Foley, and Hines, 2005). Foreign direct investment includes theestablishment of subsidiaries by foreign companies, subsequent investments in such subsidiaries,
the acquisition of domestic firms, and other foreign investments that are expected to be long

	
  

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lasting in nature. Foreign direct investment is therefore much different than foreign portfolio
investment. Brazil’s decision to lift barriers to foreign direct investment meant that restrictions on
profit and capital repatriations for foreign multinational companies were reduced. Hence, an
American company such as Pepsi, which has a subsidiary in Brazil, now has fewer restrictions
on the timing and amount of profits and capital that it can repatriate. Desai, Foley, and Hines(2005) show that this type of financial liberalization results in more foreign direct investment.
Brazil also liberalized its stock market in 1991 (Bekeart, Harvey, and Lundblad, 2005),
thereby lifting restrictions that barred foreigners from owning shares of companies listed on its
domestic stock exchange. Unipar Carbocloro, SA is one such company that trades on theBrazilian stock exchange. Since 1991, foreigners have been able to invest in its shares.
However, not all firms in Brazil were made investable to foreigners in 1991; some firms retained
legal restrictions, while others were too small or illiquid to be practically investable. In thefinance literature firms are classified as either investable or uninvestable by the International
Finance Corporation’s Investability Indices (IFCI). The Brazilian company Bombril, SA did not
become investable until 1994, three years after Brazil liberalized its stock market.
Brazil’s decision to liberalize its stock market did not affect Pepsi’s ability to repatriate its
profits and capital; that was affected by Brazil’s decision to lift barriers to foreign direct
investment. Brazil’s foreign direct investment liberalization did not affect the ability of investors
to buy shares in Bombril, SA; that was made possible by Brazil’s decision to liberalize its equity
market and Bombril’s size and liquidity. However, in Brazil the liberalization of foreign direct
investment and the liberalization of the equity market happened in the same year (1991), most
likely along with other capital account and economic liberalizations that we do not observe (e.g.,
many emerging markets have changed policies regarding foreign lending and deposits in

	
  

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domestic banks). Moreover, contemporaneous policy changes like this are not uncommon.
Examining the emerging markets studied in Desai, Foley, and Hines (2005) that overlap with oursample, almost all of the countries that had foreign direct investment liberalizations in their study
also had equity market liberalizations in the same year, or within a one-year difference (e.g.,
Chile, Columbia, Egypt, Greece, Mexico, Philippines, and Peru; India had liberalizations thatwere 3 years apart). For this reason, identifying the effects of equity market liberalization on
economic growth is difficult.
We reason that if equity market liberalization is causing the growth effects documented
in previous studies, then we should be able to observe its impact on the share issuance andinvestment of publicly traded firms that are investable to foreigners, as these are the only firmsthat are directly affected by this policy. Using data from 24 different emerging markets, we findthat if a firm is investable to foreigners, its share issuance and investment tend to be lower, nothigher. We consider the possibility that investability only impacts firms that rely more on
external funding. We follow Rajan and Zingales (1998) and Gupta and Yuan (2009) andconstruct industry-level measures of equity dependence, and estimate whether share issuanceincreases more following investability for firms that depend on equity finance. We find thatinvestability has the same effect on firms from both more and less equity dependent industries; inboth cases, investability is associated with less share issuance. If investable firms do raise capital
they are more likely to issue debt than equity, although debt issues are not higher for investablefirms. We obtain similar findings when we study these effects around the country-liberalization
year, in that there is not an increase in either share issuance or investment in publicly tradedfirms. These findings contradict the idea that equity market liberalization promotes growth by
reducing financial constraints and increasing investment in publicly traded firms.

	
  

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We extend our analyses by replacing investability with actual foreign institutional
ownership. In these tests, share issuance and investment are found to be lower when foreign
ownership is higher, although the effects are not statistically significant. Moreover, we find that
although foreign institutional ownership increases after a firm becomes investable, the effect isvery small. The median investable firm has only 5.3% of its shares held by foreign institutions,
too small to be have any real effects. Hence, although we find that share issuance and investment
are significantly lower for investable firms, we don’t think the relation is a casual one, as theamount of foreign institutional ownership is in our view too small to be important. We think it ismore likely that firms are made investable once they reach a certain level of maturity, and maturefirms simply grow more slowly and issue fewer shares.
To further explore the idea that contemporaneous policies could be causing the growtheffects associated with equity market development, we ask whether equity market liberalizations
are associated with increases in foreign direct investment. As we explain above, equity market
liberalization does not affect foreign direct investment per se, however liberalizing the equity
market tends to happen contemporaneously with other financial and economic reforms thatencourage foreign direct investment. Consistent with this idea, we find significant increases inforeign direct investment following a country’s equity market liberalization year. The economic
magnitude of these effects is very large; on average, foreign direct investment more than doubles
in the few years that follow the liberalization of an emerging equity market.
Our findings build on previous studies, which show that emerging stock markets are
dominated by firms that are unlikely to benefit from foreign institutional investors. La Porta,
Lopez-de-Silanes, and Shelifer (1999), Claessens, Djankov, and Lang (2000), and Morck,
Wolfenzon, and Yeung (2005) show that in emerging markets the larger publicly traded firms

	
  

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tend to be family-owned (or at least not widely-held), often in pyramid structures, and thatspecial voting rights often create big divergences between ownership and control. Whenemerging equity markets are liberalized, it is these firms that become investable to foreigners.
Yet it is unlikely that these firms are capital constrained, and even more unlikely that these firms
will heed to foreign monitors. Moreover, a literature on cross-listing shows that firms inemerging markets can access foreign capital by listing on foreign exchanges (see Karolyi (2005)
and Doidge et al. (2010)). Aggarwal, Erel, Ferreira, and Matos (2010) show that foreign
institutional ownership improves corporate governance and firm performance in developed
markets, however they do not study the emerging market countries in our sample. Bekaert,
Harvey, and Lundblad (2005) show that the effects of financial liberalization on GDP growth are
weaker in countries with low levels of financial development and investor protection, which
describes most emerging markets. So it could be the case that foreign portfolio investment isimportant in countries with more developed equity markets and more firms that are widely held,such as the U.S. and the U.K., whereas in emerging markets foreign direct investment matters
more.
The remainder of this paper is organized as follows. Section 1 describes the data, sample
characteristics, and variable construction. Section 2 discusses the firm-level investability
findings. Section 3 discusses the liberalization-year event study findings. Section 4 discusses ourforeign direct investment results, and Section 5 concludes the paper.

	
  

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1. Sample and Measurement
1.1. Sample and Data
Our data comes from several different sources. We obtain equity market liberalization
dates from Bekaert, Harvey, and Lundblad (2005). From Standard and Poor’s we obtain theInternational Finance Corporation (IFC) Investability indices (IFCI) for 24 different emerging
markets. The firms in the indices are deemed to be investable both legally and feasibly toforeigners. A second variable provided by IFC, the investable weight factor (IWF), reflects thedegree of openness, or the upper bound on the percentage of shares that can be legally andfeasible held by foreigners. Both IFC indices are commonly used in the liberalization literature(e.g., Edison and Warnock (2003), Li et al. (2004), Bekaert, Harvey, Lundblad, and Siegel(2007), Bekaert, Harvey, and Lundblad (2010), Mitton (2006), Mitton and O’Connor (2010), Liet al. (2010), and Bae et al (2012).
From Worldscope we obtain annual financial data, and from Datastream we obtainmonthly data on shares outstanding and stock returns. To be in our sample a firm must be listed
in the IFC investable index for at least one year and have shares outstanding from Datastream. If
an observation has shares outstanding from Datastream and is also in the IFC investable index,
we characterize this observation as investable; if an observation has shares outstanding from
Datastream and is not in an IFCI index, we refer to it as uninvestable, so long as it belongs to a
firm with at least one year of investable data. Our sample contains 26,767 firm-year observations
and 1,834 firms during the period 1988-2010.

	
  

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1.2. Describing the Sample
Panel A of Table 1 reports the liberalization year for each country, and describes oursample in terms of the number of firms, the total number of firm-years, and the percentage offirm-years that are investable to foreigners in each country. We also report the average maximum
percentage of shares that can be held by foreigners in each country.
Table 1 shows that the liberalization dates are clustered in time; most liberalizations
occurred between the years 1988 and 1992. The sample contains 26,767 firm-year observations;
41.6% of which are investable, and 1,834 firms in total. The average investable weight factor,
which reflects the maximum number of shares that can be held by foreigners, is 26.5%. As we
mention above, our sample is limited to firms with both Datastream and IFC coverage, so wehave fewer firms as compared to the IFC indices. Panel B of table 1 provides summary statistics
for several of the main variables that are used in our regression analyses. We will refer back tothe statistics in Panel B when interpreting the economic significance of our findings.

1.3. Firm-Level Variables
Share issuance is the real change in shares outstanding, or the log change in the numberof shares outstanding adjusted for distribution events such as stock splits and stock dividends.
Our measurement of share issuance follows McLean, Pontiff, and Watanabe (2009). We use thecapital adjustment index from Datastream recorded at the end of month t (CAIt) to calculate thenumber of real shares outstanding for that month (Adjusted Sharest). The CAI is the cumulative
product of the inverse of the individual-period capital adjustment factor (AX).
t

CAIt = ∏1/AXi .
i =1

	
  

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Adjusted Sharest is then given by:
Adjusted Sharest = Shares Outstandingt / CAIt.
We use Adjusted Shares to compute a 1-year share issuance measure.
Share Issuancet= Ln(Adjusted Sharest) – Ln(Adjusted Sharest-1).
Size and Liquidity Criterions. IFC requires that a firm have a minimum market
capitalization and a minimum dollar trading volume in order to be classified as investable. These
minimums have of course changed over time. Following Mitton (2006), we create a size criterion
variable equal to 1 if the firm’s market capitalization is greater than $50M USD, and zerootherwise. We also create a liquidity criterion variable that is equal to 1 if the firm’s dollar
trading volume over the past 12 months exceeds $20M USD, and zero otherwise. Our sample
covers more recent years than Milton (2006) (his sample ends in 2000), and we use $100M USD
as the size criterion and $50M USD trading volume as the liquidity criterion during the years
after 2000. These values reflect IFC’s most recently reported size and liquidity criterions.
Cash flow. We measure cash flow from operations as net income plus amortization anddepreciation, all scaled by assets measured at the beginning of the year.
Leverage. We measure leverage as total debt scaled by the book value of assets.
Tobin’s q (q). Tobin’s q is estimated as the market value of equity, minus the book valueof equity, plus the book value of assets, all scaled by the book value of assets. We use the log ofthis q measure in our regression analyses. Mitton and O’Connor (2010) show that investablefirms tend to have higher q’s.
Capex/PPE is measured as capital expenditures scaled by property, plant, and equipment
at the beginning of the year.	
  	
  

	
  

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Asset Growth is the log change in total assets.
Debt Issuance is the annual log change in total debt.

2. Is Investability Associated with More Equity Issuance and Investment?
Some empirical evidence regarding liberalization and investability is consistent withinvestability reducing financial constraints and lowering capital costs. If investability reduces
financial constraints, then all else held equal, investable firms should issue more shares andinvest more than uninvestable firms. In this section, for the first time, we directly estimate therelations between investability and share issuance, and between investability and other measuresof external finance dependence and investment.

2.1 Firm-Level Investability and Share IssuanceIn this section we estimate panel regressions with firm and year fixed effects to test
whether investability is related to share issuance. The regressions tell us whether within-firmchanges in investability over time are associated with within-firm changes in share issuance. As
we mention above, we use two different investability measures. The first is a binary measure(IFCI) that is equal to 1 if the firm’s shares can be held by foreigners and zero otherwise. The
second is a continuous measure (IWF), which reflects the maximum percentage of a firm’sshares that can be held by foreigners. We measure share issuance from year t to t+1 and regress iton the investability variables measured at time t, along with control variables.
The findings in Table 2 cast doubt on the idea that investability reduces financial
constraints. In regressions 1 and 2, which include only the investability measures along with thefirm and year fixed effects, both investability measures are negative and statistically significant.

	
  

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The coefficient for the binary investability measure in regression 1 is -0.022 (t-statistic = -4.76).
The average firm fixed effect is about 0.064, so this represents a sizeable decline in shareissuance during the years when a firm is investable compared to years when it is not investable.
This finding is reinforced in Figure 1, which plots share issuance on and around the year thatwhen firms become investable. Figure 1 shows that share issuance is highest 2 years before theinvestability year, and then declines once the firm is investable.
Regressions 3 and 4 include several control variables. If firms are either too small or
illiquid, IFCI denotes them as uninvestable. Hence, we use the binary variables Size Criterionand Liquidity Criterion to control for these effects. We also control for growth opportunities (q),leverage, and cash flow. Once these controls are added, the investability measures are stillnegative, although the continuous investability measure is insignificant.
The results in Table 2 are inconsistent with the idea that equity market liberalization
promotes growth by reducing financial constraints among already public firms. The financial
constraints hypothesis predicts that the investability coefficients are positive and significant. In
contrast, the results in Table 2 show that the coefficient is negative; firms issue less equity during
the years that they are investable as compared to the years that they are uninvestable. Thesefindings go against the idea that the growth effects associated with investability andliberalization are the result of reduced financial constraints from equity finance among public
firms.

2.2 Investability and Share Issuance: The Effects of External-Dependence
The results in Table 2 show that investability is not associated with greater shareissuance. However, not all firms are in need of equity finance. Perhaps investability is associated

	
  

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with greater share issuance, but only among firms that are more dependent on equity finance. To
investigate this hypothesis we assign each firm an equity dependence value based on its
industry’s equity dependence ranking.
To measure external dependence we follow Rajan and Zingales (1998) and create
industry-level measures of equity dependence using U.S firms, and then assign the dependence
values to each of the firms in our 24 emerging markets. This method is also used in Gupta andYuan (2009), Brown, Martinson, and Petersen (2012), and Hsu, Tian, and Xu (2013).	
   The idea isthat the U.S. capital market has the least amount of frictions, so measuring equity dependencewith U.S. data ought to reveal which industries are the most externally dependent. Anotheradvantage of using U.S. data is that the resulting external dependence measures are exogenous
with respect to the firms in our sample.
We measure equity dependence as the dollar amount of net equity issues scaled by capital
expenditure (dollar value equity issues / capex). We take the median value of this measure foreach U.S. industry-year, using 2-digit SIC codes to define industries. We then take the average ofthe yearly medians, and compute a single industry-value. We estimate the measure during theperiod 1980-2012.
The regressions in Table 3 are similar to those in Table 2, only in Table 3 we include aninteraction between the investability measures and the equity dependence measure. If
investability promotes growth by reducing financial constraints, then the investability-equity
dependence interactions should be positive and significant.
In each of the regressions in Table 3, the interactions are insignificant. Hence,
investability does not have a disproportionate effect on firms from industries that rely more on
equity finance, which contradicts the idea that investability promotes growth by relaxing

	
  

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financial constraints. The results in Table 3 are therefore inconsistent with the idea thatinvestability promotes growth because it makes equity finance more available; if this were thecase, then we would observe a disproportionately positive effect on the share issuance of more
dependent firms. The findings here instead suggest that if liberalization causes growth, then it
must do so by some other channel besides the reduction of financial constraints in publicly
traded firms.

2.3. Investability and Investment
In this section of the paper we ask whether investability is associated with higher
investment. The idea is that if equity market liberalization causes more investment and growth,then we should observe higher investment in firms that are investable to foreigners. The resultsfrom these tests are reported in Table 4. We define investment as the log change in total assets(Panel A) and capital expenditures scaled by property, plant, and equipment at the beginning of
the year (Panel B). We regress these two investment measures on the same set of independent
variables that were used in Table 2. The results are similar with each of the investment measures,
so we limit our discussion to the results in in Panel A.
Column 1 shows that asset growth is significantly lower during the years in which firms
are investable. The investability coefficient is -0.032 (t-statistic = 2.58), showing that asset
growth is lower after a firm becomes investable as compared to before it was investable. The
average firm fixed effect in this regression is 0.456, so asset growth is on average 7% lower
during the years in which a firm is investable as compared to the years in which it was
uninvestable. The effect is even stronger in column 3, which includes the firm-level controls
along with the binary investability measure. In this regression the investability coefficient

	
  

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is -0.035 (t-statistic = 3.49), while the average firm fixed effect is 0.187, suggesting that asset
growth is on average 19% lower during the years in which a firm is investable as compared to
the years in which a firm is uninvestable.
Columns 2 and 4 of Panel A report results with the investable weight factor (IWF), andthe effects are similar. In column 2 the IWF coefficient is negative and statistically significant,while in column 4, which includes the firm-level controls, the coefficient is negative, but notstatistically significant.
The regressions in Panel B use capital expenditure as the dependent variable. All four of
the investability coefficients are negative and three are significant, showing that like asset
growth, capital expenditures are also significantly lower for investable years. Taken together, theresults in Table 4 show that the ability to sell shares to foreign shareholders does not lead tomore investment among publicly traded firms in emerging markets.

2.4. A Closer Look Around the Event YearIn this section of the paper we take a closer look at the evolution of share issuance andinvestment around the year in which the firm first becomes investable. We limit our sample
period to the three years before, the year of, and five years after a firm becomes investable. This
framework follows Henry (2000), who shows that at the country-level private investment spikes
during the year and few years that follow a country’s liberalization of its stock market. In thisspirit, we test for spikes in share issuance and investment in the year of and right after the firmswitches from uninvestable to investable.

	
  

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𝑆ℎ𝑎𝑟𝑒  𝐼𝑠𝑠𝑢𝑎𝑛𝑐𝑒!,! =𝛼! + 𝐼𝑛𝑣𝑒𝑠𝑡𝑎𝑏𝑙𝑒!,! + 𝐼𝑛𝑣𝑒𝑠𝑡𝑎𝑏𝑙𝑒1!,! + 𝐼𝑛𝑣𝑒𝑠𝑡𝑎𝑏𝑙𝑒2!,! +   𝐼𝑛𝑣𝑒𝑠𝑡𝑎𝑏𝑙𝑒3!,! + ɛ!,!

(1)

In Eq. (1) the dependent variable is share issuance, and the investable indicator reflects
whether the firm was investable during year t, i.e., Investable is equal to 1 if the firm became
investable in year t, and zero otherwise. Investable1 is equal to 1 during the first year following
the year that the firm became investable, and zero otherwise, and so on for Investable2 andInvestable3.
In our setting spikes in share issuance and investment during the year that the firmswitches from uninvestable to investable are difficult to interpret (in the previous tables we label
the switching year as investable). As we explain previously, IFC only includes a firm in its
investable index if both the firm’s size and liquidity pass certain thresholds.. Hence, it can be thecase that because a firm invested and grew during a certain year that IFC began to label it asinvestable during that year. Put differently, year t investment could cause the firm to switch fromuninvestable to investable during year t. For this reason, we not only look for increases in shareissuance and investment during the switching year, but also during the three years that follow.
The regressions in the first three columns of table 5 ask whether share issuance and thetwo investment variables are on average higher during years 0, 1, 2 and 3 as compared to theother five years in the sample. Consistent with our previous tables, the results here show that thisis not case, as all three coefficients are negative, and two of the three are significant. Hence,share issuance and investment do not spike during the four years that include the switching year
and the three years that follow.

	
  

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In the next three regressions we examine the effect of investability in years 0, 1, 2, and 3
separately. With share issuance, the coefficient is insignificant in the first year, and then negativein the three years that follow. Asset growth is significantly higher in year zero, but then declines
in the subsequent years. Similarly, capital expenditures are significantly higher during years 0
and 1, but then decline in years three and four. The overall net effects for both investment
measures are negative but not significant, as shown in columns 2 and 3.
The results here are also displayed in Figures 1 and 2. The figures show increases inshare issuance and investment before and during the year that a firm becomes investable, andthen declines afterwards. These results are in line with the idea that growth causes the firm toincreases in size, which in turn causes IFC to switch its designation for the firm fromuninvestable to investable.
Mitton (2006) provides some evidence that capital expenditures increase following
investability. Our sample includes similar countries as Mitton’s, however we have 10 more yearsof data (our results do not change if we end our sample 2000 as Mitton’s does). In our sample theonly observable increase in investment comes during and perhaps right after the year that thefirm becomes investable. As we explain above, it is difficult to interpret this effect asinvestability causing higher investment, because IFC uses size as a criterion to define a firm as
investable, so it is plausible that the causality runs in the opposite direction; investment iscausing investability. Moreover, if we include the few years after a firm switches and examine
the total effect, we find that investment is in total lower. If we include all firm-years, as was donein Table 4, we find that investment is much lower. Regardless of specification, we never findevidence that share issuance is higher, even during the switching year.

	
  

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2.5 Foreign Ownership, Share Issuance, and Investment
In table 6 we continue to study the effects of foreigner investability, and use actual
foreign institutional ownership instead of the IFC indices that we use the previous tables. We areable to obtain foreign institution ownership data for a subsample of firms during the period 20002010 from Factset. We measure foreign ownership as shares held by foreign institutions divided
by shares outstanding.
In table 6 all of the foreign ownership coefficients are negative and insignificant. Hence,
our best guess is that foreign ownership is associated with less share issuance and investment inemerging markets, although the standard errors are too large to provide significance at standard
levels. None of the effects suggest that foreign ownership leads to more share issuance andinvestment. The results here are consistent with the earlier results in that they do not support theidea that foreign portfolio investment leads to greater externally financed growth in publicly
traded emerging market firms.

2.6. Investability and Debt IssuanceIn Table 7, we ask whether investability is associated with greater debt issuance. The
investability measure that we use reflects whether the firm’s equity can be purchased byforeigners, and therefore has no direct link to debt issuance. However, it could be that lenders are
more willing to lend to firms that have foreign shareholders, so for completeness we test for alink between investability and debt issuance. Similar to share issuance, we measure debt issuanceas the change in the log of total debt, where the change is measured over a 1-year period. We use
the same control variables that were used in the share issuance regressions in Table 2.

	
  

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In the first two regressions that do not include the control variables the coefficients areboth positive and insignificant. However, in regressions 3 and 4, which include the control
variables, both investability coefficients are insignificant and one is negative. Hence, firms do
not issue more debt during years in which they are investable as compared to years in which they
are uninvestable. The results in Table 7 therefore do not suggest that investability leads to more
externally financed investment, as investable firms do not issue more debt than uninvestablefirms, once firm-level traits are controlled for.
Taken together with the previous tables, the results here suggest that investability does
not contribute to growth by reducing financial constraints. The results instead suggest that whenfirms become investable they tend to have entered a more mature period, during which they areless dependent on external finance.

2.7. Investability and Foreign Ownership
In this section we ask whether foreign institution ownership increases after the firm
becomes investable to foreigners, and if so whether the economic significance is such that there
should be any real effects. The independent variables are the same as those used in the last table,
and in tables 2 and 4, while the dependent variable is percentage of foreign institution
shareholdings.
We report these findings in Table 8. In the first two columns, we focus on theinvestability dummy variable. Not surprisingly, foreign institution ownership significantly
increases after the firm becomes investable to foreigners. However, the economic significance isquite low. On average, the increase in foreign institution ownership is 2% (in column 1). After
controlling for other firm variables, the increase in foreign institution ownership is 1.8% (in

	
  

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column 3). The small magnitude suggests that foreign institution equity market investment plays
a very insignificant role in firm’s equity financing and investment decisions.
Figure 3 confirms that regression results in Table 8. Figure 3 shows the mean (3.A) andmedian (3.B) percentage of foreign institution ownership three years before and five years after
the investable year. The graph shows an increase in foreign ownership around the investable year
in both mean and median percentages; however, the economic magnitude of the increase is quite
small. The median foreign institution ownership is low in all years with highest number less than
5%. The results are consistent with the previous tables, and suggest that it is unlikely that foreign
institutions provide a significant equity capital to investable firms.
Figure 3 shows that there is some foreign ownership before a firm becomes investable,
albeit at trivial levels. Recall that IFC only denotes a firm as investable if it passes certain sizeand liquidity thresholds, which make it feasibly investable to foreigners along with being legallyinvestable. Our results in Figure 4 show that at least some institutions can own a small amount ofshares in uninvestable firms. However, the index seems to capture what it is supposed to, as
foreign ownership is significantly higher in investable firms.

3. Country-Liberalization Years
In this Section of the paper we focus on the country’s equity market liberalization date.
The framework here is similar to Henry (2000), who tests for an increase in private investmentusing a similar regression to the one that we describe below. Henry’s private investment data
reflects the total private investment in the country, whereas we will focus on the share issuanceand investment of publicly traded firms. Bekeart and Harvey (2000) and Henry (2003), Kim andSingal (2000), and Chari and Henry (2004) provide evidence that stock prices increase and the

	
  

18

cost of capital falls as a result of liberalization. We build on their findings and test whether theseeffects resulted in more share issues and investment in public firms. Our tests revolve aroundestimating the following firm fixed effect regression equation:

𝑆ℎ𝑎𝑟𝑒  𝐼𝑠𝑠𝑢𝑎𝑛𝑐𝑒!,! = 𝛼! + 𝐿𝑖𝑏!,! + 𝐿𝑖𝑏1!,! + 𝐿𝑖𝑏2!,! +   𝐿𝑖𝑏3!,! + ɛ!,!

(2)

In Eq. (1) the dependent variable is share issuance, and the liberalization indicator (Lib)reflects whether the country’s stock market was liberalized during year t; e.g., Lib is equal to 1 if
the country liberalized its stock market in year t, and zero otherwise. Lib1 is equal to 1 during thefirst year following a country’s liberalization, and zero otherwise, and so on for Lib2 and Lib3. In
these regressions the sample period is nine years; three years before, the year of, and five years
after the official liberalization year. We only include firms that have share issuance data for eachof the nine years. We cluster our standard errors on both year and country.
In Panel A of Table 9 we estimate six regressions, each with a different dependent
variable. The first four regressions are for (i) share issuance; (ii) share issuance of investablefirms; (iii) Asset growth; and (iv) Capex/PPE. Regressions 5 and 6 examine changes in thenumber of listed firms.
With respect to share issuance, the results in Table 9 show that equity market
liberalization is not associated with a significant increase in share issuance among public firms.
In both the first regression that includes the full sample of firms, and in the second regressionthat only includes the investable firms, neither of the coefficients is positive and significant. In
each regression at least one coefficient is negative and significant. Hence, liberalization at thecountry-level is not associated with an increase in equity finance.

	
  

19

The regressions reported in columns 3 and 4 show similar effects for asset growth andcapital expenditures. In the asset growth regression, three of the four coefficients are negative,
and none is significant. In the capital expenditure regression, three of the coefficients arenegative and one is positive and marginally significant. The regressions in the last two columns
examine whether there is an increase in the number of public listed firms on and around thecountry’s equity market liberalization year. We obtain data on the number of public listed firms
from World Bank. The coefficients in both regressions are positive, but none is significant.
Panel B reports the results from similar regression as panel A, but instead compares shareissuance, investment, and listed firms before and after the stock market liberalization year. The
results are essentially the same as panel A. Post-liberalization, there is not a significant increasein either share issuance or investment, nor is there a significant increase in the number ofpublicly listed firms. Taken in their entirety, the results in Table 9 fail to find increases ininvestment and share issuance among public listed firms on and around a country’s liberalization
year. The findings are therefore inconsistent with the idea that equity market liberalization causes
the increases in growth and investment documented in previous studies.

4. Foreign Direct Investment
In this section of the paper we focus on the idea that confounding factors cause thegrowth effects associated with equity market liberalization. Given the similarities in foreign
direct investment liberalization years and equity market liberalization years discussed in thepaper’s Introduction, we tests whether foreign direct investment increases on and around equity
market liberalization years. As we mention previously, equity market liberalization does not

	
  

20

affect foreign direct investment per se, but it could be the case that other barriers to foreign
investment are also eased around the time that the equity market is first liberalized.
To test for this effect we collect data on foreign direct investment (FDI) from the United
Nations and test whether it increases during and after the year that a country liberalizes its stock
market. We measure both gross and net FDI inflows, and scale these flows by either GDP or
capital stock measured at the beginning of the year. In Figure 3 we plot net FDI scaled by GDP(Panel A) and net FDI scaled by capital stock (Panel B). These graphs clearly show that FDI
begins to significantly increase during the equity market liberalization year, and this increase
continues during the five years that follow the liberalization year.
The effects displayed in the figures are tested statistically in the regression in table 10. In
these regressions a dummy variable tests whether FDI is greater during the liberalization year
and years after liberalization than before. The results show that FDI is significantly higher
afterwards. In all of the regressions the coefficient for the post-liberalization dummy variable ispositive and statistically significant. The results are significant economically as well. As an
example, in column 1 the dependent variable is FDI scaled by GDP. In this regression theintercept is 0.758, while the post-liberalization dummy coefficient is 1.076. Hence, FDI is on
average more than twice as large during the years after a country liberalizes its equity markets ascompare to the years before.
The results in Table 10 suggest that in general foreign investment restrictions eased inemerging markets during and after the years in which these countries decided to liberalize theirequity markets. As a result of this, foreign direct investment increased significantly. The resultsin Table 8 shows that although foreign portfolio investment may have also increased as a result

	
  

21

of equity market liberalization, it did not have any real effects, as neither share issuance nor
investment increased following the liberalization year.

5. Conclusions
In this paper we examine whether equity market liberalization leads to lower capital costs
and reductions in financial constraints, by relating both firm-year measures of foreignerinvestability and country-year measures of equity market liberalization to share issuance,
investment, and related effects. We find that foreigner-investability is associated with lower
share issuance and lower investment. These findings are inconsistent with the idea that equity
market liberalization causes growth, as investable firms seem to rely less on external finance andinvest less. With respect to country liberalization years, firms generally do not issue more equity
or investment more during the few years after a country liberalizes its stock market.
We then explore the idea that confounding effects could play an important role inexplaining the growth effects that have been associated with equity market liberalization. Thereis a good deal of overlap between equity market liberalization and foreign direct investment(FDI) liberalization dates. We therefore test whether foreign direct investment increases when acountry liberalizes its stock market. Consistent with this idea, we find large increases in FDI
during and after the years that follow the liberalization of a country’s stock market. It is thus
plausible that FDI and other confounding factors play prominent roles in promoting themacroeconomic investment and growth that have been associated with equity market
liberalizations.

	
  

22

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25

Figure 1: Share Issuance on and around the Investable Year (Year 0)
Share Issuance
0.09	
  
0.08	
  
0.07	
  
0.06	
  
0.05	
  
0.04	
  
0.03	
  
0.02	
  
0.01	
  
0	
  
-­‐3	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

2	
  

3	
  

4	
  

5	
  

Figure 2: Capital Expenditure on and around the Investable Year (Year 0)
Capex/PPE
0.6	
  
0.5	
  
0.4	
  
0.3	
  
0.2	
  
0.1	
  
0	
  
-­‐3	
  

	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

26

2	
  

3	
  

4	
  

5	
  

Figure 3: Foreign Institution Ownership
Figure 3.A Mean Foreign Institution Ownership around Event yearMean	
  Foreign	  Ins-tu-on	
  Ownership	
  over	  Switching	
  Year	
  
0.1	
  
0.09	
  
0.08	
  
0.07	
  
0.06	
  
0.05	
  
0.04	
  
0.03	
  
0.02	
  
0.01	
  
0	
  
-­‐3	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

2	
  

3	
  

4	
  

5	
  

Figure 3.B Mean Foreign Institution Ownership around Event year
Median	
  foreign	  Insitu-on	
  Ownership	
  over	  Switching	
  
Year	
  
0.1	
  
0.09	
  
0.08	
  
0.07	
  
0.06	
  
0.05	
  
0.04	
  
0.03	
  
0.02	
  
0.01	
  
0	
  
-­‐3	
  

	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

27

2	
  

3	
  

4	
  

5	
  

Figure 4: Foreign Direct Investment (FDI) on and around the Investable Year (Year 0)
Figure 4.A
FDI-NetInflow/GDP
3	
  
2.5	
  
2	
  
1.5	
  
1	
  
0.5	
  
0	
  
-­‐3	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

2	
  

3	
  

4	
  

5	
  

3	
  

4	
  

5	
  

Figure 4.B
FDI-NetInflow/Capital
20	
  
18	
  
16	
  
14	
  
12	
  
10	
  
8	
  
6	
  
4	
  
2	
  
0	
  
-­‐3	
  

	
  

-­‐2	
  

-­‐1	
  

0	
  

1	
  

28

2	
  

Table 1: Sample Distribution and Description
Panel A of this table describes the sample distribution among the 24 emerging markets. Official liberalization dateof each country is taken from Bekaert, Harvey, and Lundblad (2005). % of Investable Firm Years is the total numberof firm years that are covered by IFC investable index divided by the total number of firm years. Investable Weight
Factor is the maximum percentage of shares that can be held by foreigners. Panel B reports summary statistics of themain variables in the paper. Share issuance is measured as the log change of real shares outstanding. Asset growth isthe log growth of book value of assets. Capex/PPE is capital expenditure divided by fixed assets at the beginning of
the year. Debt issuance is measured as the log change of total debt. Cash flow is net income plus depreciation, allscaled by lagged total assets. Debt is total debt scaled total assets. Tobin’s q is estimated as the market value ofequity, minus the book value of equity, plus the book value of assets, all scaled by the book value of assets. We use
the log of this q measure.

Panel A: Sample distribution by country
Country
Argentina
BrazilChile
Colombia
Egypt, Arab
Rep.
GreeceIndia
Indonesia
IsraelJordanKorea, Rep.
Malaysia
MexicoPakistan
Peru
Philippines
Portugal
South Africa
Sri Lanka
TaiwanThailandTurkeyVenezuela
Zimbabwe
Total

Official
Liberalization Year
1989
1991
1992
1991
1992
1987
1992
1989
1993
1995
1992
1988
1989
1991
1992
1991
1986
1996
1991
1991
1987
1989
1990
1993

Number of
Firms
24
126
46
6
37
41
72
234
50
7
285
147
59
33
20
36
1
107
11
343
79
52
6
12
1,834

Total Numberof Firm Years
424
1247
812
107
377
734
1055
3360
708
47
4344
2598
847
557
277
514
22
1740
222
4495
1216
806
106
152
26,767

	
  

	
  

29

% of Investable
Firm Years
0.427
0.611
0.557
0.318
0.475
0.293
0.529
0.468
0.508
0.255
0.480
0.427
0.673
0.206
0.394
0.411
0.318
0.442
0.126
0.462
0.485
0.582
0.377
0.171
0.416

Investable
Weight Factor
0.359
0.390
0.311
0.270
0.221
0.279
0.292
0.135
0.300
0.123
0.295
0.292
0.481
0.184
0.288
0.201
0.309
0.319
0.125
0.278
0.179
0.308
0.370
0.060
0.265

Table 1: Sample Distribution and Description (Continued)
Panel B: Summary Statistics
Stats

Debt Issuance

Mean

Share
Issuance
0.048

Capex/PPE

0.152

Asset
Growth
0.158

Stdev

0.166

P25
MedianDebt/Assets

q

0.294

Cash
Flow
0.113

1.960

0.306

0.273

0.245

0.466

0.137

0.212

0.557

0.000

-0.126

0.006

0.071

0.048

0.100

-0.099

0.000

0.050

0.102

0.161

0.099

0.254

0.160

P75

0.009

0.358

0.236

0.326

0.163

0.405

0.544

N

26,76725,85625,65924,99825,20527,65925,924

	
  	
  
	
  

	
  

	
  

30

Table 2: Firm-Level Regressions of Share Issuance and Investability	
  This table reports results for regressions in which the dependent variable is share issuance. Share issuance ismeasured as the log change of real shares outstanding. "IFCI" is a dummy variable equal to one if at the beginningof year the firm is included in S&P IFCI index, i.e. in that firm year, the firm is both legally and feasibly investable
to foreigners, and zero otherwise. "IWF" is the foreign investable weight factor; it is the maximum percentage ofshares that can be held by foreigners. "Mktcapcrit" equals to one if the beginning of year market capitalization is atleast $50M USD. "Liquidcrit" equals to one if the dollar trading value in the previous 12 months is at least $20M
USD. "Cash Flow" is net income plus depreciation scaled by lagged assets. "q" is Tobin’s q. "Debt/Assets" is total
debt scaled by total assets. All regressions include firm and year fixed effects. Standard errors are clustered both atcountry and year level as recommended by Peterson (2009). * Significant at 10%; ** Significant at 5%; ***Significant at 1%.

(1)-0.022***(-4.76)

IFCI
IWF

(2)

-0.021***(-3.72)

Mktcapcrit
Liquidcrit
Cash Flowq
Debt/Assets
Observations
R-squared

26,7670.126

26,767
0.124

	
  
	
  

	
  

(3)
-0.011**(-2.49)	
  31-0.044***(-3.35)-0.021***(-3.13)-0.060(-1.31)0.028***(2.77)
0.104***(2.93)
15,8340.175(4)-0.005(-0.72)-0.047***(-3.30)-0.022***(-2.94)-0.060(-1.32)0.027***(2.75)
0.104***(2.89)
15,8340.174

Table 3: Share Issuance, Investability, and Equity DependenceThis table reports results for regressions in which the dependent variable is share issuance. Share issuance ismeasured as the log change of real shares outstanding. "IFCI" is a dummy variable equal to one if at the beginningof year if the firm is included in S&P IFCI index, i.e. in that firm year, the firm is both legally and feasibly
investable to foreigners, and zero otherwise. "IWF" is the foreign investable weight factor; it is the maximum
percentage of shares that can be held by foreigners. "Mktcapcrit" equals to one if the beginning of year market
capitalization is at least $50M USD. "Liquidcrit" equals to one if the dollar trading value in the previous 12 months
is at least $20M USD. "Cash Flow" is net income plus depreciation scaled by lagged assets. "q" is Tobin’s q.
"Debt/Assets" is total debt scaled by total assets. Panels A and B include financial dependence and equity
dependence interactions respectively. “Eq. Dep”. is the average industry-year median of equity dependence based on
U.S. industry data over the same sample period. Eq. Dep. is measured as the dollar amount of share issuance scaled
by capital expenditures. All regressions include firm and year fixed effects. Standard errors are clustered both atcountry and year level as recommended by Peterson (2009). * Significant at 10%; ** Significant at 5%; ***Significant at 1%.

IFCI
IFCI*Eq. Dep.

(1)-0.024***(-4.94)0.007(0.91)

IWF(2)-0.023***(-3.17)0.005(0.36)

IWF*Eq. Dep.
Mktcapcrit

Constant

0.057***(10.42)0.058***(10.95)-0.045***(-3.36)-0.021***(-3.11)-0.059(-1.29)0.027***(2.70)
0.105***(2.97)
0.003(0.22)

Observations
R-squared

26,6660.126

26,6660.125

15,7600.174

Liquidcrit
Cash Flowq
Debt/Assets

	
  

	
  

(3)
-0.013***(-2.69)0.009(0.76)

32(4)-0.005(-0.54)0.002(0.07)-0.047***(-3.31)-0.022***(-2.92)-0.060(-1.30)0.027***(2.70)
0.105***(2.94)
0.005(0.36)
15,7600.174

Table 4: Firm-Level Regressions of Investments and Investability
This table reports results for regressions in which the dependent variables are log of asset growth in Pane A andcapital expenditure divided by fixed assets at the beginning of the year (Capex/PPE) in Panel B. "IFCI" is a dummy
variable equal to one if at the beginning of year the firm is included in S&P IFCI index, i.e. in that firm year, thefirm is both legally and feasibly investable to foreigners, and zero otherwise. "IWF" is the foreign investable weightfactor; it is the maximum percentage of shares that can be held by foreigners. "Mktcapcrit" equals to one if the
beginning of year market capitalization is at least $50M USD. "Liquidcrit" equals to one if the dollar trading value
in the previous 12 months is at least $20M USD. "Cash Flow" is net income plus depreciation scaled by lagged
assets. "q" is Tobin’s q. "Debt/Assets" is total debt scaled by total assets. All regressions include firm and year fixed
effects. Standard errors are clustered both at country and year level as recommended by Peterson (2009). *Significant at 10%; ** Significant at 5%; *** Significant at 1%.

Panel A: Asset Growth
IFCI

(1)
-0.032**(-2.58)IWF(2)-0.037*(-1.90)

Mktcapcrit
Liquidcrit
Cash Flowq
Debt/Assets
Observations
R-squared

25,6590.296

25,659
0.295

	
  

	
  

(3)
-0.035***(-3.49)33

0.001(0.05)-0.001(-0.05)0.233***(2.89)
0.116***(4.07)-0.215***(-10.55)
15,6620.299(4)-0.028(-1.56)-0.005(-0.27)-0.002(-0.09)0.231***(2.89)
0.114***(4.04)-0.218***(-11.33)
15,6620.298

Table 4: Firm-Level Regressions of Investments and Investability (Continued)
Panel B: Capex/PPE
IFCI

(1)
-0.037***(-2.93)IWF(2)-0.047**(-2.51)

Mktcapcrit
Liquidcrit
Cash Flowq
Debt/Assets
Observations
R-squared

	
  

(3)
-0.025*(-1.68)24,9980.318

24,998
0.318

34

0.002
(0.15)-0.000(-0.03)0.288*(1.93)
0.114***(3.73)-0.241***(-7.87)
15,5610.362(4)-0.036(-1.64)0.001(0.08)
0.001(0.05)
0.285*(1.91)
0.114***(3.75)-0.244***(-7.95)
15,561
0.362

Table 5: Share issuance and Investment on and around the Event Year
This table reports regression results for share issuance and investment around the years when firms become
investable to foreigners. We only include three years before, the year of, and five years after the firm becomes
legally and feasibly investable to foreigners, i.e. is included in S&P IFCI index. "IFCI" is a dummy variable equal to
one for all the investable years and zero otherwise. Investable_Year0 is a dummy variable equal to one for the event
year, i.e. the year when the firm becomes investable to foreigners, zero otherwise; Investrable_Year1 is equal to one
for the first year after the event, zero otherwise; Investable_Year2 is equal to one for the second year after the event,zero otherwise; Investable_Year3 is a dummy variable equal to one for the third year after the event year, and zerootherwise. All regressions include firm fixed effect and standard errors clustered at both country and year. Shareissuance and investment variables are defined the same as those in previous tables. * Significant at 10%; **Significant at 5%; *** Significant at 1%.

(1)

(2)

(3)

(4)

(5)

(6)

Share
Issuance-0.019***Asset
Growth-0.036*Capex/PPE

Share
Issuance

Asset
GrowthCapex/PPE(-3.34)(-1.87)(-1.52)0.009

0.062***

0.096***(1.03)(2.84)(3.38)

Investable_Year1-0.016***-0.0110.039*(-2.89)(-0.61)(1.88)

Investable_Year2-0.014***-0.031**-0.033*(-2.91)(-2.26)(-1.90)-0.001-0.008-0.025**IFCI-0.029Investable_Year0

Investable_Year3	
  (-0.19)(-0.80)(-2.15)Observations

9,193

9,577

9,256

9,193

9,577

9,256

R-squared

0.217

0.370

0.416

0.217

0.374

0.420

35

Table 6: Foreign Institution Ownership, Share Issuance, and Investment
This table reports regression results in which share issuance and investment are the dependent variables and themain independent variable is the percentage of foreign institution shareholdings. Share issuance and investment aremeasured the same as previous tables. “Foreign%” is the percentage of shareholdings by foreign institutions at the
beginning of the year. "Mktcapcrit" equals to one if the beginning of year market capitalization is at least $50M
USD. "Liquidcrit" equals to one if the dollar trading value in the previous 12 months is at least $20M USD. "CashFlow" is net income plus depreciation scaled by lagged assets. "q" is Tobin’s q. "Debt/Assets" is total debt scaled bytotal assets. All regressions include firm and year fixed effects. Standard errors are clustered both at country andyear level as recommended by Peterson (2009). * Significant at 10%; ** Significant at 5%; *** Significant at 1%.

	  Foreign%

(1)

(2)

(3)

(4)

(5)

(6)

Share
Issuance

Share
Issuance

Asset Growth

Asset Growth

Capex/PPE

Capex/PPE-0.019

0.010

0.093

0.098

0.083

0.045

(-0.54)(0.19)(0.77)(0.83)(1.32)(1.08)

Mktcapcrit.
Liquidcrit.
Cash Flowq
Debt/Assets-0.026***-0.010-0.007(-4.95)(-0.92)(-0.81)-0.017**-0.016-0.009**(-2.47)(-1.18)(-2.06)-0.016-0.0060.043(-0.55)(-0.14)(0.65)

0.014**

0.064***

0.085***(2.32)(3.65)(4.34)

0.107***-0.197***-0.267***(3.02)(-5.21)(-6.11)

Observations

23,037

16,08323,242

15,698

23,102

15,756R-squared

0.24

0.26

0.32

0.32

0.43

0.44

	
  

	
  

36

Table 7: Debt Issues and Investability
This table reports regression results in which the dependent variable is firms' debt issuance. "IFCI" is a dummy
variable equal to one if at the beginning of year if the firm is included in S&P IFCI index, i.e. in that firm year, thefirm is both legally and feasibly investable to foreigners, and zero otherwise. "IWF" is the foreign investable weightfactor; it is the maximum percentage of shares that can be held by foreigners. "Mktcapcrit" equals to one if the
beginning of year market capitalization is at least $50M USD. "Liquidcrit" equals to one if the dollar trading value
in the previous 12 months is at least $20M USD. "Cash Flow" is net income plus depreciation scaled by lagged
assets. "q" is Tobin’s q. "Debt/Assets" is total debt scaled by total assets. All regressions include firm and year fixed
effects. Standard errors are clustered both at country and year level as recommended by Peterson (2009). *Significant at 10%; ** Significant at 5%; *** Significant at 1%.

(1)
IFCI

(2)

0.051

0.030

(1.41)(0.89)

IWF

(4)

0.070

-0.006(1.25)(-0.10)

Mktcapcrit.
Liquidcrit.
Cash Flowq
Debt/Assets

	
  

(3)

0.099*

0.110**(1.94)(2.19)-0.0020.002(-0.03)(0.04)

0.053

0.053

(0.18)(0.18)

0.049

0.052

(0.96)(1.04)-2.025***-2.026***(-6.92)(-6.82)

Observations

25,85625,85615,75715,757R-squared

0.049

0.049

0.081

0.081

37

Table 8: Investability and Foreign Institution OwnershipThis table reports the regression results of foreign institution ownership on investability. The dependent variable isthe percentage of foreign institution shareholdings. "IFCI" is a dummy variable equal to one for all the investable
years and zero otherwise. "IWF" is the foreign investable weight factor; it is the maximum percentage of shares thatcan be held by foreigners. "Mktcapcrit" equals to one if the beginning of year market capitalization is at least $50M
USD. "Liquidcrit" equals to one if the dollar trading value in the previous 12 months is at least $20M USD. "CashFlow" is net income plus depreciation scaled by lagged assets. "q" is Tobin’s q. "Debt/Assets" is total debt scaled bytotal assets. All regressions include firm and year fixed effects. Standard errors are clustered both at country andyear level as recommended by Peterson (2009). * Significant at 10%; ** Significant at 5%; *** Significant at 1%.

	
  

IFCI

(1)
0.020***(5.91)

IWF(2)

0.039***(3.88)

Mktcapcrit
Liquidcrit
Cash Flowq
Debt/Assets
Observations
R-squared

27,4740.72

27,474
0.72

	
  

	
  

(3)
0.018***(5.04)

38

0.000(0.03)
0.008(0.92)
0.051(1.34)
0.018*(1.87)-0.015(-1.61)
18,2310.74(4)0.034***(3.22)-0.000(-0.08)0.008(0.88)
0.052(1.36)
0.019*(1.91)-0.016(-1.63)
18,2310.74

Table 9: Share Issuance and Investment on and around the Country Liberalization Year
This table reports regression results for share issuance, investment, and number of public listed firms on and aroundthe country liberalization year. Share issuance measured as the real change in shares outstanding. Investment ismeasured as log growth of total assets (Asset Growth) and capital expenditure divided by fixed assets at the
beginning of the year (Capex/PPE). Log(chglisted) is the log change in the number of public listed firms in eachcountry. Chglisted% is the percentage change in the number of public listed firms. The sample period is the three
years before, the year of, and five years after the country’s official liberalization year. Lib. Year is a dummy variableequal to one during the liberalization year, and zero otherwise. The subsequent indicator variables reflect years +1,+2, and +3 relative to the liberalization year. Post Lib. is a dummy variable equal to one for years of and after theofficial liberalization year. The regression is estimated in the full sample of firms for which we have data in each of
the 9 years surrounding the liberalization years. We also estimate the regression for investable firms. We define
investable firms as those that are investable in at least one of the post-liberalization years. The regressions include
firm fixed effects and standard errors clustered on both country and year. * Significant at 10%; ** Significant at 5%;*** Significant at 1%.

Panel A: On and Around the Country Liberalization Year

Lib. Year
Lib. Year +1
Lib. Year +2
Lib. Year +3
Observations
R-squared

Share Issuance

Share Issuance

Asset Growth

Capex/PPE

Log(chglisted)

Chglisted%

All Firms

Investable
Firms-0.009(-0.78)-0.020*(-1.67)0.006(0.18)
0.003(0.16)
2,139
0.254

All Firms

All Firms

All Firms

All Firms-0.029(-0.58)-0.076(-1.01)-0.028(-0.62)0.005(0.30)
1,530
0.245-0.025(-0.41)-0.032(-0.42)-0.044(-0.93)0.053*(1.82)
1,499
0.362

0.042
(0.95)
0.066(1.25)
0.028(0.82)
0.027(0.98)
167
0.261

0.058
(0.85)
0.094(1.22)
0.019(0.52)
0.016(0.55)
167
0.297-0.011*(-1.70)0.006(0.27)
0.006(0.23)
0.012(0.51)
4,239
0.172

Panel B: Pre and Post the Country Liberalization Year

Post Lib
Observations
R-squared	
  Share Issuance

Share Issuance

Asset Growth

Capex/PPE

Log(chglisted)

Chglisted%

All Firms

Investable
Firms

All Firms

All Firms

All Firms

All Firms

0.005(0.55)
4,239
0.171-0.016**(-2.01)
2,139
0.254

-0.054(-1.15)
1,530
0.243

-0.054(-1.15)
1,530
0.243

0.024
(0.574)
167
0.245

0.014
(0.356)
167
0.275

39

Table 10: Foreign Direct Investment on and around the Country Liberalization Year
This table reports regression results for country-level foreign direct investment (FDI) on and around the country
liberalization year. The dependent variables are: FDI inflow as a percentage of GDP (FDIIn_GDP%), FDI net
inflow as a percentage of GDP (FDINet_GDP%), FDI inflow as a percentage of total capital (FDIIn_Capital%), FDI
net inflow as a percentage of total capital (FDINet_Capital%), and log change of the level of FDI inflow(Log(chgFDIIn). The sample period is the three years before, the year of, and five years after the country’s official
liberalization year. Post Lib. is a dummy variable equal to one for years of and after the official liberalization year.
The regressions include country fixed effects and standard errors clustered on both country and year. * Significant at
10%; ** Significant at 5%; *** Significant at 1%.

Post Lib
Observations
R-squared

FDIIn_GDP%

FDINet_GDP%

0.994***(3.459)207
0.445

0.858***(2.898)207
0.380

FDIIn_Capital%
5.577**(2.762)
207
0.267

	
  

	
  

40

FDINet_Capital%
5.080**(2.520)207
0.209

Log(chgFDIIn)
0.008***(4.107)207
0.123