Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-18T19:34:11.014Z Has data issue: false hasContentIssue false
  • English
  • Français

A Liberalization Spillover: From Equities to Loans

Published online by Cambridge University Press:  19 December 2022

Xin Liu Open the ORCID record for Xin Liu [Opens in a new window] ,
Shang-Jin Wei  and
Yifan Zhou Open the ORCID record for Yifan Zhou [Opens in a new window]
Xin Liu
Affiliation:
College of Business and Economics, Research School of Finance, Actuarial Studies and Statistics, Australian National University xin.liu@anu.edu.au
Shang-Jin Wei
Affiliation:
Columbia Business School, FISF, ANU, NBER, and CEPR shangjin.wei@columbia.edu
Yifan Zhou*
Affiliation:
Fudan University Fanhai International School of Finance
*
yifanzhou@fudan.edu.cn (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad (2005), Journal of Financial Economics 77, 3–55) in spite of a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 395 - 433
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Geert Bekaert, Jennifer Carpenter, Anusha Chari, Wei Xiong, Xiaohui Zhang, and seminar and conference participants at Australian National University, Columbia Business School, Monash Macro-Finance Conference, University of Adelaide, and Chinese University of Hong Kong – Shenzhen for their useful comments. Part of this research was completed when Zhou was a PhD student at the University of Melbourne. Zhou thanks the University of Melbourne’s FBE GRATS scholarship for financial support. The authors alone are responsible for any errors and omissions.

References

Altman, E. “Financial Ratios, Discriminant Analyses and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Bae, K.-H.; Bailey, W.; and Mao, C. X.. “Stock Market Liberalization and the Information Environment.” Journal of International Money and Finance, 25 (2006), 404–428.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C.. “Foreign Speculators and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565–613.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Does Financial Liberalization Spur Growth?” Journal of Financial Economics, 77 (2005), 3–55.CrossRefGoogle Scholar
Bekaert, G.; Campbell, R. H.; and Lundblad, C.. “Financial Openness and Productivity.” World Development, 39 (2011), 1–19.CrossRefGoogle Scholar
Berg, T.; Saunders, A.; and Steffen, S.. “The Total Cost of Corporate Borrowing in the Loan Market: Don’t Ignore the Fees.” Journal of Finance, 71 (2016), 1357–1392.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Bonfiglioli, A. “Financial Integration, Productivity and Capital Accumulation.” Journal of International Economics, 76 (2008), 337–355.CrossRefGoogle Scholar
Campello, M.; Chen, L.; and Zhang, L.. “Expected Returns, Yield Spreads, and Asset Pricing Tests.” Review of Financial Studies, 21 (2008), 1297–1338.CrossRefGoogle Scholar
Chari, A., and Henry, P. B.. “Risk Sharing and Asset Prices: Evidence from a Natural Experiment.” Journal of Finance, 59 (2004), 1295–1324.CrossRefGoogle Scholar
Chari, A., and Henry, P. B.. “Firm-Specific Information and the Efficiency of Investment.” Journal of Financial Economics, 87 (2008), 636–655.CrossRefGoogle Scholar
Cetorelli, N., and Goldberg, L.. “Global Banks and International Shock Transmission: Evidence from the Crisis.” IMF Economic Review, 59 (2011), 41–76.CrossRefGoogle Scholar
Deng, Y.; Liu, X.; and Wei, S.-J.. “One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?” Journal of Financial Economics, 130 (2018), 663–692.CrossRefGoogle Scholar
Dollar, D., and Wei, S.-J.. “Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China.” NBER Working Paper No. 13103 (2007).CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fisman, R.; Shi, J.; Wang, Y.; and Xu, R.. “Social Ties and Favoritism in Chinese Science.” Journal of Political Economy, 126 (2018), 1134–1171.CrossRefGoogle Scholar
Friewald, N.; Wagner, C.; and Zechner, J.. “The Cross-Section of Credit Risk Premia and Equity Returns.” Journal of Finance, 69 (2014), 2419–2469.CrossRefGoogle Scholar
Gao, W. “Does Large Shareholders’ Stock Pledge Agreements Affect Listed Firms’ Bank Loans?” (in Chinese). Financial Regulation Research, 10 (2018), 46–64.Google Scholar
Gupta, N., and Kathy, Y.. “On the Growth Effect of Stock Market Liberalizations.” Review of Financial Studies, 22 (2009), 4715–4752.CrossRefGoogle Scholar
Henry, P. B. “Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices.” Journal of Finance, 55 (2000), 529–564.CrossRefGoogle Scholar
Henry, P. B. “Capital-Account Liberalization, the Cost of Capital, and Economic Growth.” American Economic Review, 93 (2003), 91–96.CrossRefGoogle Scholar
Henry, P. B. “Capital Account Liberalization: Theory, Evidence, and Speculation.” Journal of Economic Literature, 45 (2007), 887–935.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Lu, Z.. “Digesting Anomalies: An Investment Approach.” Review of Financial Studies, 28 (2015), 650–705.CrossRefGoogle Scholar
Houston, J. F.; Jiang, L.; Lin, C.; and Ma, Y.. “Political Connections and the Cost of Bank Loans.” Journal of Accounting Research, 52 (2014), 193–243.CrossRefGoogle Scholar
Huang, Y.; Uchida, K.; and Zha, D.. “Market Timing of Seasoned Equity Offerings with Long Regulative Process.” Journal of Corporate Finance, 39 (2016), 278–294.CrossRefGoogle Scholar
Infante, L., and Piazza, M.. “Political Connections and Preferential Lending at Local Level: Some Evidence from the Italian Credit Market.” Journal of Corporate Finance, 29 (2014), 246–262.CrossRefGoogle Scholar
Ivashina, V. “Asymmetric Information Effects on Loan Spreads.” Journal of Financial Economics, 92 (2009), 300–319.CrossRefGoogle Scholar
Jia, C.; Wang, Y.; and Xiong, W.. “Market Segmentation and Differential Reactions of Local and Foreign Investors to Analyst Recommendations.” Review of Financial Studies, 30 (2017), 2972–3008.CrossRefGoogle Scholar
Keim, D., and Stambaugh, R.. “Predicting Return in the Stock and Bond Markets.” Journal of Financial Economics, 17 (1986), 357–390.CrossRefGoogle Scholar
Kim, H., and Singal, V.. “Stock Market Openings: Experience of Emerging Economies.” Journal of Business, 73 (2000), 25–66.CrossRefGoogle Scholar
Kose, M. A.; Prasad, E.; Rogoff, K.; and Wei, S.-J. “Financial Globalization: A Reappraisal.” IMF Staff Papers, 56 (2009), 8–62.CrossRefGoogle Scholar
Levine, R., and Zervos, S.. “Stock Market Development and Long-Run Growth.” World Bank Economic Review, 10 (1996), 323–340.CrossRefGoogle Scholar
Levine, R., and Zervos, S.. “Stock Markets, Banks, and Economic Growth.” American Economic Review, 88 (1998), 537–558.Google Scholar
Li, C.; Xu, R.; and Zhou, Y.. “Star Academicians: Gimmicks or Game-Changers?” Working Paper, Fudan University (2021).Google Scholar
Li, F.; Qian, J.; Wang, H.; and Zhu, J.. “Stock Pledged Loans, Capital Markets, and Firm Performance in China.” Working Paper, available at https://ssrn.com/abstract=3758847 (2020).CrossRefGoogle Scholar
Li, Z. “On the Growth Effects of Equity Market Liberalization.” Journal of Economic Development, 37 (2012), 59–77.Google Scholar
Lim, J.; Minton, B.; and Weisbach, M.. “Syndicated Loan Spreads and the Composition of the Syndicate.” Journal of Financial Economics, 111 (2014), 45–69.CrossRefGoogle Scholar
Lin, C.; Ma, Y.; Malatesta, P.; and Xuan, Y.. “Ownership Structure and the Cost of Corporate Borrowing.” Journal of Financial Economics, 100 (2011), 1–23.CrossRefGoogle Scholar
Liu, C.; Wang, S.; and Wei, K. C. J.. “Demand Shock, Speculative Beta, and Asset Prices: Evidence from the Shanghai-Hong Kong Stock Connect Program.” Journal of Banking & Finance, 126 (2021), 106102.CrossRefGoogle Scholar
Liu, J.; Akbar, S.; Ali Shah, S. Z.; Zhang, D.; and Pang, D.. “Market Reaction to Seasoned Offerings in China.” Journal of Business Finance & Accounting, 43 (2016), 597–653.CrossRefGoogle Scholar
Liu, J.; Stambaugh, R.; and Yuan, Y.. “Size and Value in China.” Journal of Financial Economics, 134 (2019), 48–69.CrossRefGoogle Scholar
Ma, C.; Rogers, J. H.; and Zhou, S.. “The Effect of the China Connect.” Working Paper, Fudan University (2021).Google Scholar
Merton, R. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Mitton, T. “Stock Market Liberalization and Operating Performance at the Firm Level.” Journal of Financial Economics, 81 (2006), 625–647.CrossRefGoogle Scholar
Moshirian, F.; Tian, X.; Zhang, B.; and Zhang, W.. “Stock Market Liberalization and Innovation.” Journal of Financial Economics, 139 (2021), 985–1014.CrossRefGoogle Scholar
Peters, R., and Taylor, L.. “Intangible Capital and the Investment-q Relation.” Journal of Financial Economics, 123 (2017), 251–272.CrossRefGoogle Scholar
Rajan, R., and Zingales, L.. “Financial Development and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Roll, R. “A Critique of the Asset Pricing Theory’s Tests Part I: On Past and Potential Testability of the Theory.” Journal of Financial Economics, 4 (1977), 129–176.CrossRefGoogle Scholar
Schaefer, S., and Strebulaev, I.. “Structural Models of Credit Risk are Useful: Evidence from Hedge Ratios on Corporate Bonds.” Journal of Financial Economics, 90 (2008), 1–19.CrossRefGoogle Scholar
Schnabl, P. “The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market.” Journal of Finance, 67 (2012), 897–932.CrossRefGoogle Scholar
Vassalou, M., and Xing, Y.. “Default Risk in Equity Returns.” Journal of Finance, 59 (2004), 831–868.CrossRefGoogle Scholar
Yao, Y.; Xu, G.; Lin, N.; and Wang, Y.. “Research on the Prerequisites and Promoting Strategies of China’s Interest Rate Liberalization” (in Chinese). Financial Regulation Research, 39 (2015), 1–24.Google Scholar
Supplementary material: PDF

Liu et al. supplementary material

Internet Appendices

Download Liu et al. supplementary material(PDF)
PDF 801.8 KB