A Liberalization Spillover: From Equities to Loans

The opening of equity markets to foreign investment appears generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad, 2005) in spite a relatively small role such for financing most economies. We propose possible spillover channel from market lower costs bank loans, which helps explain this puzzle. From analyzing loan data associated with China’s introduction the Qualified Foreign Institutional Investors (QFII) program, we find significant support channel. Furthermore, show that reduction risk premium is important mechanism.