Equity Market Liberalization And Stock Price Behavior

This paper investigates into the impact of equity market liberalization on stockprice behavior by undertaking an event study on22countries which liberalized theirequity market from1980s through now. With controls on other factors includingeconomic reforms, macroeconomic fundamentals and potential co-movements, itcarefully examines the abnormal return before and after the liberalization.The empirical result shows: First, during the an event window of7months afterthe opening of the security market, stock price soared and there exists an averageabnormal return of3.0%per month; the result is also significant after considering thecontrol variables. Second, while descriptive findings indicate that there would becapital outflow and decline of stock price in the second year after liberalization, it isattested to be not statistically significant.Through further analysis of the result, the phenomenon of first-year stock pricerise supports the implication of the theory that capital account liberalizationcontributes to the liberalizing nation’s lower cost of capital and thus higher equitydemands. The finding of insignificant decline of stock price in the second yearsuggests a lack of evidence of second-year reversal from a global-wide perspective.Combined with empirical results, this paper conducts case study on Brazil andChile’s stock markets’ reaction towards de-liberalization policies, and providessuggestions to investors and policy makers.