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Equity market liberalization and corporate governance
Authors:Kee-Hong Bae  Vidhan K Goyal
Institution:1. College of Business & Entrepreneurship, The University of Texas Rio Grande Valley, Edinburg, TX 78539, USA;2. Haub School of Business, Saint Joseph''s University, Philadelphia, PA 19131, USA;3. School of Business, State University of New York at Oswego, Oswego, NY 13126, USA;4. Craig School of Business, Missouri Western State University, St Joseph, MO 64507, USA;1. Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824, USA;2. Terry College of Business, University of Georgia, Athens, GA 30602, USA;3. School of Business, University of Kansas, Lawrence, KS 66045, USA;1. PBC School of Finance, Tsinghua University, China;2. School of Economics and Management, Tongji University, China;3. School of Accounting and Finance, Hong Kong Polytechnic University, China;1. Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822, USA;2. Center for Economics, Finance and Management Studies (CEFMS), Hunan University, Changsha 410006, China;3. Accounting Department, Management School, Jinan University, Huangpu Road West, Guangzhou 510632, China
Abstract:Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.
Keywords:
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