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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)
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Abstract

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

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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.

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