Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices

The decade from 1984 to 1994 witnessed unprecedented emerging stock market liberalizations, as governments from Caracas to Kuala Lumpur opened their equity markets to non-residents for the first time. Emerging market stock prices also boomed during this period. It is tempting to conclude that the stock market openings were responsible for the jump in asset prices, but the wave of openings was concurrent with a period of drastic economic reform. What then, caused the boom? Was it external opening, reform, or both? By constructing an exhaustive list of all major stock market liberalizations and economic reforms occurring in twelve LDCs from 1984 to 1994, I am able to disentangle the effects of stock market opening from the influence of economic reform. The results are striking. The effects of stock market liberalization are at most two thirds as large as suggested by previous work, and economic reforms are an equally important source of asset revaluation.