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Firm-Specific Information and the Efficiency of Investment

Authors: Henry, Peter
Chari, Anusha
Issue Date: Jan-2007
Publisher: Center on Democracy, Development, and Rule of Law
Abstract: We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm’s capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm’s expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.
Appears in Collections:Peter Henry's Collection

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