Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter?

Abstract

This article examines the empirical link between financial openness and informational efficiency of stock markets in 27 emerging markets. Improving on earlier papers, this study has used World Bank's Worldwide Governance Indicators (WGI) as the proxy of institutional development in dynamic panel data models estimated by generalized method of moments (GMM). Our results show, first, financial liberalization by itself has no impact on enhancing efficiency of stock market. Second, for countries with high level of institutional development, the interaction of trade openness and financial openness become significant. Third, for the same group of countries, interaction effect of financial liberalization and institutional development leads to more efficiency in stock market. Hence, our finding demonstrates the utmost importance of institutional development and its role on liberalization. Our results conclude that institutional development and trade openness are pre-requisites for a country to benefit from financial openness. Our study further provides empirical evidence to theoretical model proposed by Basu and Morey (2005) that governance is the missing link between stock market efficiency and financial liberalization. Our findings suggest that policy makers in developing economies should enhance the quality of their institution in order to optimize the benefits of financial liberalization.

Economic Liberalization and Economic Growth: An Empirical Analysis of Pakistan

“…Table 4.2 lists that Kar (1983); Zebib and Muoghalu (1997) Haroon and Nasr (2011) Pakistan Total amount of debt servicing Lim and Kim (2011) 23 Developing countries Sum of the gross stocks of foreign assets and liabilities as a share of GDP Spatafora and Luca (2012) Net equity inflows (percent of GDP) Net debt inflows (percent of GDP) Net bond inflows (percent of GDP) Law and Azman-Saini (2013) Malaysia FDI inflows Portfolio inflows (Naghavi and Lau, 2014) 27 Emerging markets Sum of equity in-and outflows as a share of GDP: annual capital flows Saadaoui (2015) Gross foreign assets as sum of foreign assets and liabilities…”

Does the Capital Market Opening Improve the Price Discovery Efficiency of Stock Market? An Empirical Research Based on Shanghai-Hong Kong Stock Connect

“…Furthermore, Shangjin [11] found that if here are domestic financial distortions in developing countries, capital account opening may increase the crisis. Naghavi and Lau [12] indicated that only when the capital market meet institution development, the opening improves the pricing discovery efficiency of stock market and then improves the resource allocation efficiency of stock market. Some papers researched the economic consequences of capital market opening based on Shanghai-Hong Kong Connect.…”