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Indiana University Bloomington

Department of Finance

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Research and Publications

Journal Articles

On the Growth Effect of Stock Market Liberalizations

2009, Review of Financial Studies

Nandini Gupta, Kathy Yuan


Using panel data on industries in emerging markets, we investigate the effect of a stock market liberalization on industry growth. Consistent with the view that liberalization reduces financing constraints, we find that industries that are more externally dependent and face better growth opportunities grow faster following liberalization. However, this increase in industry growth appears to come from an expansion in the size of existing firms rather than through new firm entry, which is puzzling since new firms are typically more financially constrained. To reconcile these conflicting results we examine whether barriers to entry arising out of institutional and regulatory frictions affect the impact of liberalization on new firms. We find that liberalization leads to new firm growth at the industry level in countries that allocate capital more efficiently, and in industries that privatize government-owned firms. From a policy perspective these results suggest that a stock market liberalization will have a larger and more uniformly distributed growth impact if it is accompanied by complementary reforms that enhance competition.


Gupta, Nandini and Kathy Yuan (2009), "On the Growth Effect of Stock Market Liberalizations," Review of Financial Studies, Vol. 22, No. 11, pp. 4715-4752.