Winners and losers from financial sector openness: A Firm’s international exposure matters

We study the effects of financial sector openness on domestic firms. To do so, we explore a policy experiment following the announcement of a broad financial sector liberalization in China. We find that this event has heterogeneous stock-market effects on domestic firms. We use foreign ownership, overseas M&As and exports as proxy variables for international exposure, and find that firms with international exposure experience lower returns than the others. In addition, this negative influence of international exposure is weaker if the firm is state-owned, large, or located in a province with relatively high institution quality. We provide a stylized model that rationalizes these results, which shows that after the financial sector opens up, firms with international exposure lose their advantage in obtaining cheap credit, and face fiercer competition than before. Our findings shed novel light on the channels through which financial sector openness affect firms in developing countries.