better corporate governance practices, reducing agency problems (Stulz, 1999; Errunza, 2001). Therefore, liberalization was expected to result in deeper and more efficient stock markets. Bekaert, Harvey, and Lundblad (2001) find that liberalization had a positive impact on domestic trading and listing. Jain-Chandra (2002) also finds significant increases in trading activity and reports improvements in market efficiency following liberalization. Bae, Bailey, and Mao (2006) find that stock market liberalization improves the information environment in emerging markets.<sup>19</sup> Our data for dating the liberalization of stock markets come from three sources: Bekaert, Harvey, and Lundblad (2005), who present official liberalization dates, mostly for developing countries; Kaminsky and Schmukler (2003), who construct an index of the extent of stock market liberalization which also includes developed economies; and Vinhas de Souza (2005), who extends this index to Eastern European countries.<sup>20</sup> We combine these three sources to get the widest possible coverage.<sup>21</sup> As part of the capital market reform programs, governments approved new laws and regulations aimed at creating the proper legal and regulatory framework for capital markets to flourish. Many countries tried to improve corporate governance practices, by introducing new standards in a number of different areas, including voting ratings, tender procedures, and the structure of the board of directors. Some countries also enacted new insider trading regulations and improved accounting and disclosure standards. As we mentioned above, the recent literature has emphasized the role of the protection of minority investors for the development of stock markets. Most of the cross-country data available for this variable is time invariant, and therefore cannot be used to analyze the impact of reforms. To account for improvements in the legal framework for investors, we thus focus on the enforcement of insider trading regulations. The date of insider trading laws enforcement is the date of the first prosecution under these laws. These data come from Bhattacharya and Daouk (2002), who carry out a comprehensive survey of insider trading laws, finding that these laws existed in 87 countries by 1998 but had been enforced, as evidenced by prosecutions, in only 38 of them. They also find that the cost of equity does not change after the introduction of insider trading regulations, but decreases considerably after the first prosecution.

Policymakers also took important strides towards establishing and improving the basic environment for capital market operations, including new policies related to

> 19 Levine and Zervos (1998b) analyze the impact of capital account liberalization on stock market development in 16 developing countries and find evidence of significant increases in market capitalization and trading in most countries.

20 For the data from Kaminsky and Schmukler (2003) and Vinhas de Souza (2005), we consider the first year when a country’s stock market is fully liberalized as the liberalization date. Alternatively, we also used the date of the first partial liberalization and obtained similar results.

21 Alternatively, we also ran regressions using only the Bekaert, Harvey, and Lundblad (2005) dates and their “First Sign” liberalization measure, which is based on the earliest of three possibilities: the launching of a country fund, an ADR announcement, and the official liberalization date. We obtained similar results using these variables.

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