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

A stock market liberalization is a decision by a countrys government to allow foreigners to purchase shares in that countrys stock market. On average, a countrys aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing countrys cost of equity capital by allowing for risk sharing between domestic and foreign agents.