Financial Openness & Institutions in Developing Countries

Abstract The paper examines for foreign portfolio investment recent result that foreign direct investment has positive effect on institutions in developing countries. Promise of firms to improve governance (in order to raise funds from outsiders) is more credible if they cross-list on the U.S. stock exchange. Stringent disclosures required by the U.S. are available to domestic regulators who become under pressure to follow global standards. Using 48 developing countries, I show greater openness of stock and bonds markets leads to better quality relevant institutions. I use both a natural experiment, viz. 2008 financial crisis outflows, and 2SLS/IV estimation to examine the endogeniety issues.