Showing papers in "Financial Management in 2009"

Capital Structure Decisions: Which Factors Are Reliably Important?

Abstract: This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.

Determinants of the Size and Composition of US Corporate Boards: 1935-2000

Abstract: We examine the determinants of the size and composition of corporate boards for a sample of 82 US companies that survived during the period 1935-2000. Our hypotheses lead to predictions that firm size, growth opportunities, merger activity, and geographical expansion are important determinants of these board characteristics. We find empirical evidence that the four variables are significant determinants of the size and/or composition of boards. After controlling for these determinants of board characteristics, we find no robust relation between firm performance and either board size or composition.

International evidence on financial derivatives usage

Abstract: Theory predicts that nonfinancial corporations might use derivatives to lower financial distress costs, coordinate cash flows with investment, or resolve agency conflicts between managers and owners. Using a new database, we find that traditional tests of these theories have little power to explain the determinants of corporate derivatives usage. Instead, we show that derivative usage is determined endogenously with other financial and operating decisions in ways that are intuitive but not related to specific theories for why firms hedge. For example, derivative usage helps determine the level and maturity of debt, dividend policy, holdings of liquid assets, and international operating hedging.

Local Effects of Foreign Ownership in an Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan

Abstract: We examine the local effects of equity ownership by investors who are classified as qualified foreign institutional investors in Taiwan. Our empirical analyses reveal a pronounced foreign ownership effect, whereby stocks with high foreign ownership outperform stocks with low foreign ownership. The valuation effect is present even after controlling for firm export, size, or transparency levels. We pursue a performance-based explanation for this effect and find that foreign ownership is strongly and positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance. Our evidence is consistent with foreign investors who enjoy a long-run information advantage over domestic investors.

Trade Receivables Policy of Distressed Firms and Its Effect on the Costs of Financial Distress

Abstract: This paper studies the trade receivables policy of distressed firms as the trade-off between the firm's willingness to gain sales and the firm's need for cash. We find that firms increase trade receivables when they have profitability problems, but reduce trade receivables when they have cash flow problems. We also find that a firm that significantly cuts its trade receivables when in financial distress will experience an additional drop of at least 13% in sales and stock returns over the previously documented 20% average drop for financially troubled firms. Moreover, the performance decline of a firm in financial distress is significantly higher if the firm cuts trade receivables than if it does not.

Determinants of Investment Cash Flow Sensitivity

Abstract: I classify firms into groups of high, low, and negative sensitivity. I find that investment-cash flow sensitivity is nonmonotonic with respect to financial constraints, cash flows, and growth opportunities. Firms classified as negative cash flow sensitive have the lowest cash flows, highest growth opportunities, and appear the most financially constrained. Cash flow insensitive firms have the highest cash flows, lowest growth opportunities, and appear the least financially constrained. To a large extent, the negative relationship between cash flow and investment is driven by the opposite trends followed by investment and cash flow, as firms grow through stages of their life cycle.

Are interlocked directors effective monitors

Abstract: This paper examines whether the presence of interlocked directors on a board is associated with weak governance. For a sample of 3,566 firm-years spanning 2001 to 2003, we find that firms with lower industry-adjusted firm performance are more likely to have interlocked directors. We document that shareholders react negatively to the formation of director interlocks and find that the presence of interlocked directors is associated with lower than optimal pay-performance sensitivity of CEO incentive compensation and reduced sensitivity of CEO turnover to firm performance. Collectively, our results suggest that the presence of interlocked directors is indicative of weak governance.

The Impact of Fundamentals on IPO Valuation

Abstract: We examine how initial public offering (IPO) valuation has changed over time by focusing on three time periods: 1986-1990, January 1997 to March 2000 (designated as the boom period), and April 2000 to December 2001 (designated as the crash period). Using a sample of 1,655 IPOs, we find that firms with more negative earnings have higher valuations than do firms with less negative earnings and firms with more positive earnings have higher valuations than firms with less positive earnings. Our results suggest that negative earnings are a proxy for growth opportunities for Internet firms and that such growth options are a significant component of IPO firm value.

Corporate Governance Ratings and Firm Performance

Abstract: We examine the corporate governance ratings provided by three premier US rating agencies and find that summary scores are generally poor predictors of primary and secondary measures of future firm performance. However, some component sub-ratings that focus on the eight key dimensions of dynamic governance structures provide more positive and reliable evidence of their information content in predicting the multiple dimensions of firm performance. These results reflect the recent observations by academic researchers and money managers that it is extremely difficult to distill all of the complex governance mechanisms into a single integrated, yet informative overall score.

Prebid Run-Ups Ahead of Canadian Takeovers: How Big Is the Problem?

Abstract: Les auteurs examinent la maniere dont evoluent le cours des actions et le volume des transactions aa l'approche d'une offre publique d'achat (OPA); leur echantillon englobe 420 entreprises canadiennes ayant ete l'objet de telles operations entre 1985 et 2002.

Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital

Abstract: Managing the different companies in which they invest while at the same time performing portfolio optimization for themselves, venture capitalists position themselves as a pure-play or diversified conglomerate through their cumulative portfolios. I examine the effects of two investment strategies of venture capitalists: 1) a specialist “pure-play” strategy that maximizes venture capital involvement and 2) a more generalist strategy of diversification at the “firm” level that minimizes portfolio risk. I find that neither strategy optimizes both venture capital growth and time to entrepreneurial exit, which highlights a need for institutional investors to clarify fund objectives at the time a fund is established.

Equity Market Comovement and Contagion: A Sectoral Perspective

Abstract: This paper takes an asset pricing perspective to investigate the equity market comovement and contagion at the sector level during the period 1990-2004 across the regions of Europe, Asia, and Latin America. It examines whether unexpected shocks from a particular market, or group of markets, are propagated to the sectors in other countries. The results confirm the sector heterogeneity of contagion. This implies that there are sectors that can still provide a channel for achieving the benefits of international diversification during crises despite the prevailing contagion at the market level. In addition, the results lend support to the importance of financial links in the propagation of contagion.

A Multistage Model of Loans and the Role of Relationships

Abstract: We develop a multistage model of the loan granting process to understand the contradictory findings of the existing literature on bank-borrower relationships, credit availability, and loan rates. Upon estimating our model with the 1993, 1998, and 2003 versions of the Survey of Small Business Finances data set, we find that relationships matter in a borrower’s decision whether to apply for a loan and in the loan approval/rejection decision by the financial institution. However, the effect of relationships on loan rates depends on the prevailing economic climate. While firms with preexisting relationships obtain credit at lower rates during periods of economic expansion, loan rates are not negatively correlated with preexisting relationships during periods of economic recession.

Are Debt and Incentive Compensation Substitutes in Controlling the Free Cash Flow Agency Problem

Abstract: This paper investigates the governance implications of a firm s capital structure and managerial incentive compensation in controlling the free cash flow agency problem. The results suggest: debt and executive stock options act as substitutes in attenuating a firm s free cashflow problem; failure to incorporate the substitutability and endogeneity leads to underestimates of the magnitude and economic implication of the disciplinary role of both mechanisms; firm characteristics differ across the prevalence of debt usage versus option usage, suggesting the heterogeneity in the costs and benefits of the monitoring devices; and all the above effects are more pronounced in firms that tend to have more severe agency problem. Agency theory predicts that self-serving managers may make nonvalue-maximizing decisions with internal free cash flow by investing in negative net present value projects for private benefits (Jensen, 1986). This behavior is known as overinvestment associated with the free cash flow agency problem, which reflects the conflicts between shareholders and managers. It is important to analyze effective mechanisms to mitigate this agency problem. These mechanisms can either restrict the available resources for overinvestment or align the interests between shareholders and managers. In this paper, I focus on debt and incentive compensation that represent the two types of devices, respectively. Debt directly reduces the free cash flow due to the precommitment of interest payment. On the other hand, incentive compensation prevents managers from investment overaggressiveness through interest alignment. In addition, these two are influential mechanisms considering the importance of capital structure and compensation structure in a firm's policy decisions. Imposing discipline by setting managerial incentives or adjusting capital structure is relatively easy as compared with other mechanisms. l Previous empirical studies have looked at the effects of debt and incentive compensation separately. For example, Harvey, Lins, and Roper (2004) argue that debt mitigates the free cash flow problem in emerging markets, where overinvestment agency costs are potentially extreme.

On the Use of Multifactor Models to Evaluate Mutual Fund Performance

Abstract: We show that multifactor performance estimates for mutual funds suffer from systematic biases and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade impact, and trading restrictions, the factor premiums are either over- or underestimated. We argue that factor proxies based on mutual fund returns rather than on stock returns provide better benchmarks to evaluate professional money managers.

An Empirical Comparison of Option Pricing Models in Hedging Exotic Options

Abstract: This paper examines the empirical performance of various option pricing models in hedging exotic equity options. We consider exotic options because models are mainly used to price or hedge exotic or illiquid options in practice, and the model risk becomes more important when exotic options are concerned. We test these models in the same way as market practitioners use them: models are fitted to the prices of the liquid options and are recalibrated whenever models are used to mark-to-market the option under consideration or to set up hedging portfolios. Since exotic options are traded in the overthe-counter market, historical data are not readily available, and the traditional model testing approach of comparing market prices with model prices can no longer be adopted. We propose a new methodology to overcome this difficulty: the model performance is based on the accuracy of hedging a synthetically created exotic option. Using the historical S&P 500 index option prices, we show that the alternative option pricing models outperform the Black-Scholes model in hedging exotic options that are close to vanilla options, such as short-term barrier options and compound options. However, they do not always outperform the frequently recalibrated Black-Scholes model in hedging options with severe exotic features, such as long-term barrier options. Our results also show that the model performance depends on the degree of path dependence of the option under consideration, and the most important feature in improving the performance of the Black-Scholes model is to build the stochastic volatility feature into the models.

The Conditional Beta and the Cross‐Section of Expected Returns

Abstract: We examine the cross-sectional relation between conditional betas and expected stock returns for a sample period of July 1963 to December 2004. Our portfolio-level analyses and the firm-level cross-sectional regressions indicate a positive, significant relation between conditional betas and the cross-section of expected returns. The average return difference between high- and low-beta portfolios ranges between 0.89% and 1.01% per month, depending on the time-varying specification of conditional beta. After controlling for size, book-to-market, liquidity, and momentum, the positive relation between market beta and expected returns remains economically and statistically significant.

Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis

Abstract: We examine the market reaction to announcements of actual share repurchases, events that cluster both within and across firms. Using a multivariate regression model, we find that the market reacts positively to the events, indicating that these announcements provide additional information to that contained in the initial repurchase intention announcements. Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase. Our findings generally support the hypothesis that share repurchases reduce the agency costs of excessive free cash flow.

Information, Selective Disclosure, and Analyst Behavior

Abstract: This paper examines whether the prohibition of selective disclosures to equity research analysts mandated by Regulation FD alters the amount of information and the manner in which it is revealed to the market. We demonstrate that equity research analysts are more responsive to information contained in company-initiated disclosures after Reg FD, suggesting that regulation has affected the importance of various channels of communication. We also present evidence consistent with the notion that managers use earnings guidance as a substitute for selective disclosure following the passage of Reg FD. Ever since Dirks versus the Securities Exchange Commission (SEC) established a legal frame work for conducting equity research, stock analysts have been the recipients of selective disclo sures of private information from the companies they follow.' Historically, companies have been allowed to release material information to analysts without simultaneously making it available to public investors. For example, if management wanted to lower earnings expectations, it could make selective disclosures to analysts who would then lower their earnings forecasts. In this man ner, companies were able to indirectly release important information without having to publicly disclose its exact nature.2 Under the leadership of Arthur Levitt, the SEC determined that selective disclosures were unfair to public investors. The adoption of Regulation Fair Disclosure (Reg FD) in October 2000 was designed to "level the playing field" for all investors by prohibiting selective disclosures to analysts and institutional investors, thereby requiring firms to make public, within 24 hours, all disclosures of material information. The passage of Reg FD has spawned a debate concerning the quantity and quality of information that will be available to investors in this new environment. Our paper contributes to this literature by addressing the following questions: 1) do firms rely more on public disclosure after Reg FD? 2) do equity research analysts, the former beneficiaries of selective disclosure, rely more on

Underpricing and Ex Post Value Uncertainty

Abstract: As documented by a vast empirical literature, initial public offerings (IPOs) are characterized by underpricing. A number of papers have shown that underpricing is directly related to the amount of ex ante uncertainty concerning the IPOs valuation. Recent theoretical papers propose that not all value uncertainty is resolved prior to the start of trading, but rather continues to be resolved in the beginning of the after market. We term this type of uncertainty as ex post value uncertainty and develop proxies for it. We find strong support for the existence of ex post value uncertainty and find that including a proxy for it more than doubles the explanatory power of previous models.

The Relation between IPO Underpricing and Litigation Risk Revisited: Changes between 1990 and 2002

Abstract: This paper reexamines the litigation risk hypothesis of initial public offering (IPO) underpricing in different legal and economic environments. When litigation risk is reduced in the three-year period after the enactment of the Private Securities Litigation Reform Act of 1995, firms' litigation risk plays a less significant role in IPO underpricing strategy. Furthermore, underpricing deters more traditional IPO lawsuits compared to that effect in the pre-1995 period. In the period after that, however, there is another structural change in which firms again use underpricing as insurance against IPO lawsuits. This underpricing may actually have led to greater litigation relating to IPO allocation irregularities.

Short Selling and the Weekend Effect for NYSE Securities

Abstract: Using short-sale transactions data, we examine the relation between short selling and the weekend effect. We do not find that short selling is more abundant on Monday than on Friday, even for stocks that have higher Friday returns. We find that short sellers execute more short-sale volume during the middle of the week, and that the positive correlation between short selling and returns on Monday is greater, on average, than the correlation on the other days of the week. Our results are robust to subsamples of stocks with larger weekend effects and stocks that do not have listed options.

Liquidity: Considerations of a Portfolio Manager

Abstract: This paper examines liquidity and how it affects the behavior of portfolio managers, who account for a significant portion of trading in many assets. We define an asset to be perfectly liquid if a portfolio manager can trade the quantity she desires when she desires at a price not worse than the uninformed expected value. A portfolio manager is limited by both what she needs to attain and the ease with which she can attain it, making her sensitive to three dimensions of liquidity: price, timing, and quantity. Deviations from perfect liquidity in any of these dimensions impose shadow costs on the portfolio manager. By focusing on the trade-off between sacrificing on price and quantity instead of the canonical price-time trade-off, the model yields several novel empirical implications. Understanding a portfolio manager’s liquidity considerations provides important insights into the liquidity of many assets and asset classes. This paper examines liquidity and how it affects investor behavior, focusing on the considerations of a mutual fund portfolio manager. US mutual funds are the largest investor in US commercial paper with 47%, and they hold 35% of US tax-exempt debt, 27% of US equities, and about 10% of US corporate, Treasury, and agency debt (Investment Company Institute, 2008). Total mutual fund holdings worldwide equaled $26 trillion at year-end 2007. An understanding of the liquidity considerations of a portfolio manager therefore provides important insights into the liquidity of many assets and asset classes. A portfolio manager seeks to optimize the performance of her portfolio relative to her performance benchmarks. In this pursuit, she is limited by both what she needs to attain and the ease with which she can attain it. This makes her sensitive to three dimensions of liquidity: price, timing, and quantity. Deviations from perfect liquidity in any of these dimensions impose shadow costs on the portfolio manager, making them key considerations in her portfolio decisions. Wedefineanassettobeperfectlyliquidifaportfoliomanagercantradethequantityshedesires when she desires at a price not worse than the uninformed expected value. A few examples serve to motivate the three dimensions of liquidity and their shadow costs. Quantity may be the most importantconsiderationforpassiveportfoliomanagers,suchasthosewhoareboundbyprospectus

Financial Restructuring in Fresh‐Start Chapter 11 Reorganizations

Abstract: We find that firms substantially reduce their debt burden in “fresh-start” Chapter 11 reorganizations, yet they emerge with higher debt ratios than what is typical in their respective industries. While cross-sectional regressions reveal that post-reorganization debt ratios are more in line with the predictions of the static trade-off theory, they also reveal that pre-reorganization debt ratios affect post-reorganization debt ratios. Collectively, these results suggest that impediments in Chapter 11 prevent firms from completely resetting their capital structures. We also find that firms that reported positive operating income leading up to Chapter 11 emerge faster, suggesting that it is quicker to remedy strictly financial distress than economic distress. Several high-profile firms such as General Motors, Chrysler, Enron, WorldCom, Kmart, Conseco, and multiple airlines have recently filed for protection from creditors under Chapter 11 of the Bankruptcy Code. While the intent of Chapter 11 is to reorganize the claims against the firms, a significant portion of the companies that file for Chapter 11 never emerge as standalone companies (Weiss, 1990; Wruck, 1990; Hotchkiss, 1995). Those that do emerge get a unique opportunity to establish a new capital structure. However, there is an ongoing debate whether the Chapter 11 process permits firms to adopt a capital structure that maximizes total value. Roe (1983) and Bebchuk (1988) argue that the Chapter 11 process imposes barriers to reducing debt, and that the process is therefore in need of reform. Alternatively, Alderson and Betker (1995) contend that the choice of capital structure for firms emerging from Chapter 11 is “free of the holdout and hidden information problems that might otherwise restrict a complete capitalstructurerearrangement.”Indeed,BruceParsons,PresidentandCEOofEBIZEnterprises, commented that EBIZ’s 2002 “reorganization plan gives us the fresh start that we need.” ConsistentwithAldersonandBetker’s(1995)argument,Gilson(1997)findsempiricalevidence that “transaction costs do not appear to be a major deterrent to reducing debt in Chapter 11.” In particular, he documents that the post-restructuring debt ratios are unrelated to pre-restructuring debt ratios suggesting that the new capital structure is completely reestablished. He also finds that firms have higher debt ratios than their industry peers upon emerging from Chapter 11 but attributes this to an increase in the optimal debt ratio during the Chapter 11 process rather than to the inability of firms to extinguish debt.

The Underpricing of Insurance IPOs

Abstract: The previous literature documents that insurance initial public offerings (IPOs) are less underpriced than those of noninsurance firms. This difference is usually attributed to lower information asymmetry for regulated firms. However, we find that once one controls for the file price adjustment insurance IPOs, both stock and mutual, are no less underpriced than other noninsurance offerings suggesting the book-building process resolves any such information asymmetries. We also find that mutual IPOs appear more underpriced than stock insurance IPOs, but this difference is related to the differences in pre-issue managerial ownership.

Evidence on the Trade-Off between Risk and Return for IPO and SEO Firms

Abstract: Do the low long-run average returns of equity issuers reflect underperformance due to mispricing or the risk characteristics of the issuing firms? We shed new light on this question by examining how institutional lenders price loans of equity issuing firms. Accounting for standard risk factors, we find that equity issuing firms’ expected debt return is equivalent to the expected debt return of nonissuing firms, implying that institutional lenders perceive equity issuers to be as risky as similar nonissuing firms. In general, institutional lenders perceive small and high book-tomarket borrowers as systematically riskier than larger borrowers with low book-to-market ratios, consistent with the asset pricing approach in Fama and French (1993). Finally, we find that firms’ expected debt returns decline after equity offerings, consistent with recent theoretical arguments suggestingthatfirmriskshoulddeclinefollowinganequityoffering.Overall,ouranalysisprovides novel evidence consistent with risk-based explanations for the observed equity returns following IPOs and SEOs. Firms conducting initial and seasoned equity offerings have historically experienced relatively low long-run equity returns (Ritter, 1991; Loughran and Ritter, 1995). Additionally, these returns covary with firm characteristics such as size and book-to-market (Brav, Geczy, and Gompers, 2000; Eckbo and Norli, 2005). Two explanations for these phenomena have been offered. The first is predicated on rational investor behavior and argues that the low average returns are commensurate with the issuing firms’ risk characteristics, as captured, for example, by size and book-to-market. The second argues that firms are able to time their equity offerings and raise capital by selling overvalued equity. Thus, the poor long-term performance of the equity issues reflects the gradual correction of asset prices to their true fundamental value and any correlation with firm characteristics is more indicative of security mispricing, as opposed to additional dimensions of systematic risk (Krigman, Shaw, and Womack, 1999; Michaely and Womack, 1999). We shed light on this debate by examining the initial pricing of loans by institutional investors to firms that have recently issued equity. Our focus on the private debt market as a laboratory within which to study the risk of equity issuing and nonequity issuing firms is intentional. Private debt is held primarily by large financial institutions, as opposed to individuals. These institutions are more likely to mitigate informational asymmetries arising between firms and

Derivatives Use, Information Asymmetry, and MNC Post‐Acquisition Performance

Abstract: We utilize a sample of US acquiring firms that engaged in international M&As to document the effects of corporate derivatives use on post-M&A long-term performance. We find that derivatives users outperform nonusers. Furthermore, we find that acquirers with derivative policies that are more comprehensive and sophisticated outperform those with less comprehensive and sophisticated policies. They, in turn, outperform acquirers with no existing policies in place. Our results are consistent with the notion that the use of derivatives lowers information asymmetry related agency problems. Furthermore, our evidence indicates that derivatives use is an important corporate activity that has a profound effect on post-M&A performance.

Does the Market Incorporate Previous IPO Withdrawals When Pricing Second-Time IPOs?

Abstract: This paper examines the initial public offering (IPO) valuations of issuers that return to the IPO market successfully after withdrawing their first IPO attempt. We find that these second-time IPOs sell at a significant discount relative to similar contemporaneous IPOs that succeed in their first attempt. We also demonstrate that switching underwriters on the second IPO attempt reduces, but does not eliminate, the discount for second-time IPOs. When compared to their matched first-time IPOs, second-time IPOs have similar price revisions and post-IPO long-run stock and operating performances. Overall, these results suggest that the negative information conveyed by the withdrawal event is incorporated into the lower offer valuations for second-time IPOs. Switching investment banks can mitigate, but not eliminate, the perceived higher risk of the second-time offerings. In the United States, issuers typically sell initial public offering (IPO) shares to the public through a process known as book-building. In book-building, an issuer hires investment banks to generate and measure investor demand for the pending issue and determine the offer price that investors are willing to pay. The issuer can cancel the offering if the offer price is not acceptable. While withdrawing the offering prevents selling the firm at an unfavorable price, it is coupled with a cost since it sends a negative public signal to the market. The potential market perception is that negative information, information not revealed by observable firm characteristics, has been revealed during the book-building phase. However, investment banks maintain secrecy over the demand schedule built in the book-building process, and investors remain unaware of the nature and magnitude of the negative information. Investigating the differences in initial returns and price revisions between second-time and first-time issuers, Dunbar and Foerster (2008) present evidence that prior withdrawal is a priced risk factor for second-time issuers that have withdrawn their previous IPO filing. In this paper, we examine the IPO valuations of second-time IPOs (issuers that return to the IPO market successfully after withdrawing their first IPO attempt) directly to investigate whether and how the market incorporates previous IPO withdrawals when pricing second-time IPOs.

The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross‐Firm Analysis of Emerging Economies

Abstract: 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.