Equity market liberalization and corporate governance

Equity market liberalization opens domestic stock markets to foreign investors. A common view of liberalization is that it improves risk sharing, increases investments and leads to higher growth. Yet the economic benefits of liberalization have not been as large as expected. There is strong evidence that foreign investors prefer to invest in relatively transparent firms and firms with better corporate governance. Such firms should benefit more from liberalization than other firms do. We examine these predictions using firm-level data around the time of the official equity market liberalization in Korea. The results show that firms that pay dividends, have more tangible assets, have lower leverage, and have better corporate governance grow faster and raise more external financing following equity market liberalization. Finally, we examine cumulative abnormal returns around the time of the liberalization in Korea and find that they are significantly higher for firms that have stronger governance. Stock price revaluations are more strongly linked to governance than to enhanced risk sharing