The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross-Firm Analysis of Emerging Economies |
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| Authors: | Sheng-Syan Chen Robin K Chou† Shu-Fen Chou‡ |
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| Institution: | Sheng-Syan Chen is a Professor of Finance at the College of Management, National Taiwan University, Taiwan.;Robin K. Chou is a Professor of Finance at the School of Management, National Central University, Taiwan.;Shu-Fen Chou is an Associate Professor of International Business at the College of Management, Lunghwa University of Science and Technology, Taiwan, and a PhD candidate at the Department of Finance, School of Management, National Central University, Taiwan. |
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| Abstract: | This study undertakes firm-level analysis of investment opportunities and free cash flow in an attempt to explain the source of the wealth effect of financial liberalization for 14 emerging countries. We find that the market's responses to stock market liberalization announcements are more favorable for high-growth firms than for low-growth firms, a result that is consistent with the investment opportunities hypothesis. We also demonstrate that firms with high cash flow experience lower announcement-period returns associated with stock market liberalization than do firms with low cash flow. Our findings suggest that the free cash flow hypothesis dominates the corporate governance hypothesis in terms of the net effect of stock market liberalization on a firm's stock returns. We further document similar evidence with regard to banking liberalization. Finally, we demonstrate that stock market liberalization leads to the more efficient allocation of capital. |
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