Capital control liberalization and stock market development

The authors address two questions: What happens to stock market size, liquidity, volatility, and integration with world capital markets after capital controls are liberalized? And what is the relationship between those indicators of stock market development and regulations about information disclosure, accounting standards, and investor protection? An analysis of data on stock markets in 16 developing countries suggests the following: a) stock markets become larger, more liquid, more integrated internationally, and more volatile after controls on capital and dividend flows are liberalized; b) easy access to information about firms is positively associated with the size and liquidity of stock markets; and c) countries that officially establishinternationally accepted accounting standards and laws to protect investors do not have substantially better- functioning stock markets than countries that do not adopt those official standards.