Stock Market Liberalization and the Information Environment

Abstract

We study the associations between openness to foreign equity investors and the information environment facing emerging market firms. Changes in openness are reflected in legal, regulatory, and cross-listing events, the fraction of stock available to foreign investors, and the size of U.S. portfolio capital flows. The information environment is reflected in firm-specific return volatility and in indicators of information production, uncertainty, and disagreement related to earnings announcements. We find that information measures typically increase with openness to foreign equity investment, particularly in the form of security cross-listings and aggregate portfolio flows.JEL Classifications:

Investability and Firm Value

“…The tests in our paper offer evidence on the effect of positive externalities of liberalisation on firm value. Previous literature hypothesises that when a firm becomes open to international investment, the increased scrutiny and analyst coverage that occurs can lead to improved governance of the firm, and that this monitoring in turn can increase firm value due to an improvement in operating performance or a reduction in expropriation (see, e.g., Stulz, 1999; Doidge et al ., 2004; Bekaert et al ., 2005; Mitton, 2006; Bae et al ., 2006). In addition, liberalisation can lead to increases in market liquidity and efficiency, or to reductions in other country‐specific risks, all of which can also lead to higher valuations.…”

Managing News Coverage around Initial Public Offerings

“…Consequently, in relation to stock prices in developed markets, stock prices in emerging markets tend to be volatile. Furthermore, Bae, Bailey, and Mao (2006) document that increased openness to foreign equity investors improves the information environment of emerging markets. Hence, the involvement of foreign investors in the domestic stock market can be related to the quality of the market.…”

The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization

“…If this is correct, and Bae et al. () support this view, we should then expect to see changes in firms' capital structures in the direction implied by improvements in corporate governance and/or a reduction in information asymmetries. Chen et al.…”

“…Secondly, liberalization events are also associated with improvements in the information environment. Prior research (Lang et al 2003;Bae et al 2006) has documented that cross-listings and stock market liberalizations improve firms' information environment. From the pecking-order theory of financing behavior (Myers and Majluf 1984), reducing information asymmetries may also alter the capital structure of firms by decreasing the relative importance of debt in favor of more information-sensitive equity.…”

“…These liberalizations have the potential to strengthen corporate governance and increase the disclosure of information by improving managerial accountability and the protection afforded to shareholders (see Kim and Singal 2000). 2 If this is correct, and Bae et al (2006) support this view, we should then expect to see changes in firms' capital structures in the direction implied by improvements in corporate governance and/or a reduction in information asymmetries. Chen et al (2012) find that improvements in transparency produce differential effects for family and non-family firms, with stronger effects found for the former.…”