Stock market liberalization and

Economics Reform and Emerging

market equity Prices
by Peter Blair Henry
PRESENTED BY KAMAL SAEED
ID 571-9580
Stock market liberalization is a decision made by government to
allow foreigners to purchase shares in the stock market.
Standard International asset pricing model (IAPMS) predict that
stock market liberalization reduces cost of equity capital and also
benefit the country risk sharing with foreign agent.
Two important implication for Stock market liberalization in
emerging market
1. Holding future cash flow stock market liberalization reduces
countries aggregate cost of equity, also news of stock market
liberalization also increase stock market equity price index
2nd is that Increase in physical investment following stock market liberalization
which causes fall of equity cost capital will transform some negative NPV
investment into positive NPV investment (this effect generate higher growth
rates of output and have broader impact of economic welfare.

This paper aims whether the data are consistent with the first of these two
implication.
Event study approached is used to access whether the stock market
liberalization is associated with revaluation of equity prices and a fall in cost of
equity capital.
12 countries have been chose to find the affect of stock market liberaziliation which
experiences of abnormal returns of 4.7% per month in real dollar terms during eight
month window leading upto implementation date.
12 countries are Venezuela, Mexico Colombo Brazil, Chile from latin America and
India Malaysia Korea The Philippine Taiwan and Thailand this countries are chosen
for general segment of two region.
All data are collected from International Financial corporation (IFC) (EMDB)Morgan
Stanley Europe Asia and Fareast index and S&P 500 index collected from EMDB and
International Finaical statistics (IFS)
Due to policymaker decision for stock market liberalization and also the policy to
take affect two vast difference in dates makes it difficult to capture the real affect of
actual stock market liberalization effect. At first some country may introduce country
funds(proxy of implementation dates ) available to foreigners and some countries
may announce straight decree of announce of stock market liberalization.
2nd way is investability index ( implementation dates) usually countries invest ability
index jumps to 10% when foreigners are allowed to hold some asset of country.
Lexis/Nexis Research software Version 4.06 Is used to find the details of stock
market liberalization date as Dow jones industrial and Bloomberg have some
restriction on data availibity.
Average time of announcement and listing of Liberalization (American Depository
Receipts)ADR are used as proxy to find a approximation of implementation date.
Which is between announcement and implementation is 3 months time.
Several subsequent liberalization.
Two relevant news to consider.
1. First stock market liberalization occurs future liberalization are anticipated and
it is known that they will take place with probability of 1.
2. First stock market liberalization takes places future liberalization are anticipated
Follow the table and explain.