The authors wish to thank Dosoung Choi, William G. Christie (the Editor), Frank C. Jen, Cheng-few Lee, and especially an anonymous referee for helpful comments and suggestions. Seminar participants at the 2005 FMA Annual Meeting, National Cheng Kung University, National Chiao Tung University, National Sun Yat-Sen University, National Taiwan University, National Tsing Hua University, and Providence University provided many valuable comments. We also thank Kim Wai Ho for providing some of the data used in this study. Robin Chou gratefully acknowledges financial support from the National Science Council in Taiwan.
The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross-Firm Analysis of Emerging Economies
Article first published online: 2 SEP 2009
© 2009 Financial Management Association International
Volume 38, Issue 3, pages 543–566, Autumn 2009
How to Cite
Chen, S.-S., Chou, R. K. and Chou, S.-F. (2009), The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross-Firm Analysis of Emerging Economies. Financial Management, 38: 543–566. doi: 10.1111/j.1755-053X.2009.01047.x
- Issue published online: 2 SEP 2009
- Article first published online: 2 SEP 2009
This study undertakes firm-level analysis of investment opportunities and free cash flow in an attempt to explain the source of the wealth effect of financial liberalization for 14 emerging countries. We find that the market's responses to stock market liberalization announcements are more favorable for high-growth firms than for low-growth firms, a result that is consistent with the investment opportunities hypothesis. We also demonstrate that firms with high cash flow experience lower announcement-period returns associated with stock market liberalization than do firms with low cash flow. Our findings suggest that the free cash flow hypothesis dominates the corporate governance hypothesis in terms of the net effect of stock market liberalization on a firm's stock returns. We further document similar evidence with regard to banking liberalization. Finally, we demonstrate that stock market liberalization leads to the more efficient allocation of capital.