To date the implementation of pension reforms we combine data from several sources, including Palacios and Pallares-Millares (2000), the International Association of Pension Funds Supervisory Authorities (AIOS), the International Federation of Pension Funds Administrators (FIAP), and the International Center for Pension Reform.<sup>30</sup> As discussed above, cross-country evidence on the determinants of stock market development shows that countries with better institutional frameworks tend to have more active stock markets. However, for many developing countries it may be very difficult, if not impossible, to replicate the institutional environment existing in developed countries. Therefore, we focus our analysis on the impact of institutional changes on stock market development and internationalization, not on the absolute quality of institutions. To date institutional improvements we use data from IMF (2005), which analyzes changes in economic institutions for approximately 90 developing countries over the 1970-2004 period. Dates of institutional transitions are based on the evolution of the Cato Institute index of economic freedom, which measures a country’s business environment by analyzing five major areas: government size, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labor, and business (see Gwartney and Lawson, 2004 for a detailed description).<sup>31</sup> IMF (2005) identifies 65 episodes of sustained transition towards higher economic freedom.

# **3. Reforms and stock market development and internationalization**

In this section, we analyze the impact of reforms on domestic stock market development and internationalization using event studies. Since we are interested in the within-country effects of reforms (abstracting from cross-country variations), we estimate fixed-effects regressions of our nine measures of domestic stock market development and internationalization on a dummy for each reform, defined by the reform dates described above.<sup>32</sup> We concentrate our analysis on a ten-year window around the reform dates (five years before and five years after, including the reform year) and include only those

> development and find evidence that the growth in contractual savings causes increases in market capitalization and trading.

> 30 Pension reforms in Australia, Denmark, the Netherlands, and Switzerland involved adding a tier to an existing system or converting a voluntary funded scheme into a mandatory one. In contrast, the reforms in the remaining countries represented major changes, shifting from publicly managed unfunded schemes to multipillar systems or to completely privately managed funded schemes. Given the difference in the nature of the reforms, we also estimated our regressions excluding Australia, Denmark, the Netherlands, and Switzerland and obtained similar results.

> 31 The index of economic freedom ranges from one (repressed) to ten (free). IMF (2005) defines the start of an institutional transition in a country as the first year in which the forward looking eight-year moving average of this index exceeds by at least one point its backward looking eight-year moving average and reaches a minimum level of four points. The list of transitions was reviewed by IMF country desks and adjusted where appropriate.

> 32 The reform dummy equals one on and after the date of reform, and zero before.

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