Abstract:
The main objective of the study has been to provide new insights into ongoing recent studies
examining the impact of stock market liberalization at both macro and micro (firm) levels. The
study focused on a single country, South Africa, whose exchange, the Johannesburg Stock
Exchange (JSE), liberalized in the 1990s. Consistent with empirical evidence from other studies
the study finds support at market, firm and sectoral level for the prediction by international asset
pricing models that stock market liberalization reduces the cost of capital. More important, the
study makes five major contributions to the literature on the impact of stock market liberalization
in emerging markets.
First, it demonstrates that some emerging market specific risks such as political and economic
risks can act stronger binding constraints to foreign investment than direct legal barriers which
foreign investors are frequently able to circumvent. The second contribution is the observation
that there are some firms (in the minority however) that will experience a significant increase in
the cost of capital following liberalization, a situation where the local price of risk is higher than
the global price of risk, contrary to international asset pricing theory. The third contribution is that
it has been empirically proved that the reduction in firms’ cost of capital following stock market
liberalization is permanent. It is not a transitory phenomenon. The fourth contribution of the study
highlights the influence of firm specific characteristics such as size of the firm, book-to-market
ratios and leverage ratios on firms’ response to impact of stock market liberalization. The
preference for large firms by foreign investors is supported, contrary to Merton’s (1987)
recognition hypothesis, and hence highlights the inconclusiveness of the debate on whether stock
market liberalization benefits both large firms and small firms. The fifth contribution is the
observation that the effective liberalization date is not the same for all firms but varies from firm
to firm.
