Impact of the stock market liberalization on the firm value of equity, investment, and performance: The case of Thailand

Abstract

Scope and Methodology of Study: This study was examined the effect of stock market liberalization on the revaluation of the firm Main board and Alien board stock return, investment rate and cost of capital, and performance. Annual firm level data from 1976 to 2003 in the Stock Exchange of Thailand is used. The total number of firms is 469 firms in 31 sectors. 1985, 1987, and 1991 are the stock market liberalization years. The main focus is on the effect of 1987 liberalization. A sub sample dataset as well as the whole dataset are used to identify the liberalization effect. Pre, during, post, and after effects of stock market liberalization are analyzed. Estimations are controlled for firm differences and then for sector differences. The fixed effects estimation and panel generalized least squares are the estimation methods. The Hausman Specification test is used to pick the best estimation method.

Finding and Conclusion: The firm Main board stock return increases from the pre-liberalization level during the 1987 stock market liberalization and declines from that level in the post and after liberalization periods. The firm Main board stock return declines from the preliberalization level in both during and after periods of the 1985 liberalization but increases in the post liberalization period. The firm Alien board stock return declines from the pre-liberalization level during the 1991 liberalization but increases in the post liberalization period. A change in firm size in the during, post, and after periods of the 1987, 1985, and 1991 liberalization does not affect the firm Main board and Alien board stock return. Firm investment rate increases from the pre-liberalization level in the post and after periods of the 1987 liberalization. When controlled variables are removed, the 1987 liberalization positively affects the firm investment rate in all liberalization periods. The 1985 stock market liberalization positively affects the firm investment rate only in the after liberalization period. The cost of capital significantly declines from the preliberalization level following the 1985 and 1987 liberalization. Firm performance significantly improves in the during, post, and after periods of the 1987 liberalization and significantly improve in both post and after periods of the 1985 liberalization.