Knut Wicksell Working Paper Series, Knut Wicksell Centre for Financial Studies, Lund University
Suppliers, Investors, and Equity Market Liberalizations
Abstract: Equity market liberalizations allow foreign investors to
acquire ownership stakes in domestic firms. Previous research on the real
impact of these events has therefore emphasized the interactions between
firms and investors. This paper shows that cross-border equity flows also
improve buyers-suppliers relationships with positive ramifications for
economic growth. Firstly, a buyer backed by foreign capital means a smaller
probability of contract failure due to default or some liquidity problems.
Secondly, liberalization-driven improvements in public and corporate
governance decrease the risk of a deliberate breach of contract.
Cross-border equity flows can thus reassure upstream firms about the
financial stability and contractual reliability of their corporate
customers. Results from panel data and event-study approach confirm that
equity market liberalizations boost output growth particularly in
industries dependent on the trust of their suppliers, establishing a novel
channel from financial globalization to the real economy.
Keywords: Cross-border equity flows; equity market liberalizations; finance and product markets; foreign ownership; financial globalization and growth; (follow links to similar papers)
JEL-Codes: F36; F43; G15; G30; (follow links to similar papers)
27 pages, June 19, 2013
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