وقتی کشورهای در حال توسعه بازارهای سهام مالی خود را آزاد می کنند

This paper is the first to explain when countries opened their financial equity markets and is the first to explain financial liberalization using a large sample of developing countries. We test several novel hypotheses. We find that equity markets are opened earlier in countries that trade more with developed countries and that have more developed financial markets. Equity markets are opened earlier in democracies, especially if the country's leader is a civilian. Our other findings are consistent with the literature, which has found greater financial market openness in countries receiving more FDI, in richer countries, and in democracies.

The liberalization of financial markets has been found to have important consequences for countries. For example, financial liberalization is widely believed to lead to more rapid economic growth,1 and there is some evidence (Wyplosz, 2002) that countries, particularly developing countries, face more exchange rate instability after financial liberalization. But these economic policies of course are endogenous. Recognizing this, several studies have explained why some equity markets are more open to foreign investors than others. The data sets used in these studies are, with one exception, completely dominated by developed countries, containing no more than a handful of developing countries. That exception ( Abiad and Mody, 2005) explains the extent of general financial liberalization in two-dozen developing countries and nearly a dozen developed countries. 2 To summarize, little is known of the determinants of when developing countries liberalize their equity markets. Our study is the first to examine the causes of equity market liberalization in a sizeable sample of developing countries. This literature has explained the extent to which a country's financial markets are open de jure to outside investors.3 Measuring the extent of financial openness requires a lot of information about many aspects of the financial market, and the methodology used to create these measures of financial openness has been subject to some debate. The data requirements of this methodology are particularly hard to satisfy in developing countries. It may be easier to determine when an equity market is generally liberalized than to measure how liberalized the market is. Ours is the first paper to explain the timing of financial liberalization. Two different types of hazard models are employed to judge the robustness of results to functional form. Studying financial liberalization among developing countries leads us to develop and test several interesting new hypotheses. A developing country's benefit from opening its equity market is greater if it attracts more foreign direct investment (FDI) or engages in more trade with developed countries. Trade with advanced countries attracts more potential investors from these countries, which increases the benefit from opening the equity market to foreign investors. Accordingly, we predict that trade with developed countries should lead developing countries to liberalize their equity markets at an earlier date. Trading with less developed countries, on the other hand, offers fewer benefits from financial liberalization. Thus, trade with advanced countries should be a more appropriate determinant of the timing of financial liberalization than the trade with all countries that the literature has studied. A similar logic suggests that more FDI should lead countries to open their equity markets sooner to attract more investors from developed countries; this effect has been studied in the literature. There is little point in opening the equity market if it is not sufficiently developed. This is not an issue in most developed countries, but it is an important consideration in developing countries. We test whether financial liberalization occurs earlier in countries with a more developed equity market. We also test whether leaders with a military background are less likely to open their equity markets, perhaps because they are more resistant to change, and whether this effect interacts with the level of democracy. The remainder of the paper is organized as follows. In the next section, we briefly summarize the previous literature and develop our hypotheses. We describe data sources and measurement in Section 3. Section 4 summarizes the econometric duration methods that will be employed to study how long it takes to open equity markets. Section 5 reports the estimation results of the Weibull and Cox duration models. Concluding remarks are found in Section 6.

This paper has examined the determinants of when 35 developing countries liberalized their financial equity markets over the last two decades. All but one of the studies of the determinants of financial liberalization have used no more than a handful of developing countries in their sample. Our study is the first to explain when financial liberalization occurs using a large sample of developing countries. And this is the only study to use duration models to explain the timing of financial liberalization in any sample of countries. The literature instead has attempted to explain why some financial markets are more open than others. Measuring the extent of financial openness is somewhat subjective and is particularly difficult in developing countries. This paper provides new estimates of the determinants of financial openness, based on when developing countries begin to open their financial equity market. We have proposed that trade with developed countries is a more appropriate measure of trade-induced incentives to open financial markets than trade with all countries. This hypothesis receives strong empirical support. The traditional trade measure, trade with all countries, is unrelated to the timing of liberalization. On the other hand, our new trade measure, trade with advanced countries, has a strong effect on when equity markets are liberalized. An increase in trade with developed countries leads developing countries to open their equity markets at an earlier date. This variable consistently has the biggest effect on the timing of financial openness of any of the variables used in the empirical analysis. An important consideration in developing countries is whether the financial markets are sufficiently developed to warrant opening them to foreign investors. The stock market turnover ratio is used to assess the vitality of the stock market. We find that countries with a more developed stock market open their equity markets earlier, but this variable has a small impact on the timing of financial liberalization. Our hypothesis that military leaders would be slower to liberalize their financial markets receives only a little empirical support. Our results suggest that the effect of democracy is more pronounced if the county's leader is not from the military. Our empirical analysis confirms a number of findings in the literature. We provide some evidence that foreign direct investment causes developing countries to open up their financial markets at an earlier date. Since FDI comes mostly from advanced countries, this complements our finding that trade with developed countries is an important determinant of when financial markets are liberalized. We also find that financial equity market liberalization occurs earlier in democracies and in richer countries. We test the robustness of our results in a variety of ways. We get similar results with: (a) the parametric Weibull or the semi-parametric Cox hazard models, (b) liberalization dates derived under several different methodologies, and (c) two measures of democratization. Thus, our findings are remarkably robust. This evidence about the factors that determine when a country opens its equity markets to foreign investors is important to the literature that examines the effects of financial liberalization. Estimates of the consequences of opening equity markets are likely to be biased if the endogeneity of this policy is not taken into account. Not surprisingly, there are few policy recommendations that emerge from a study of the determinants of a policy such as financial liberalization. Lowering tariffs and quotas on trade with developed countries and adopting policies that encourage foreign direct investment would bring about greater interaction with developed countries and thus a greater benefit from financial liberalization. Similarly, efforts to develop a country's stock market would help to attract foreign investors, which also makes financial liberalization more advantageous. Wyplosz (2002) suggests that financial liberalization may have produced more instability in countries that opened their financial markets prematurely. Similarly Prasad et al. (2003) warn of problems arising from opening the capital account when there is inadequate financial regulation. Future research could utilize the errors from our duration estimates to identify countries that were not ready to open their financial markets but still did so. Then the effects of premature liberalization on various measures of economic stability and stress could be estimated.