Erasmus Kersting (Kiel Institute; Villanova University, USA)
This paper examines the impact of World Bank programs on recipient country equity markets. We exploit a rich dataset with World Bank commitments and daily stock returns for 46 countries, allowing us to study short run market reactions to news about World Bank programs. We look separately at World Bank investment loans (that fund specific activities) and World Bank policy loans (that provide general budget support with policy reform conditions). Event study analysis shows positive abnormal stock returns on the trading day following investment loan announcements. The effect depends on loan size as well as on market characteristics. Abnormal returns following policy loan announcements vary drastically between structural adjustment loans (SALs), which the World Bank engaged in until FY2006, and the succeeding development policy loans (DPLs). SAL announcements are followed by negative abnormal returns, whereas DPL announcements are followed by positive abnormal returns. This suggests that expected macroeconomic implications of policy changes in response to loan conditions drive market reactions, and that market reactions to World Bank policy loans change in a rational way as conditionality and loan disbursement structures change. Our findings also contribute to understanding emerging stock markets and the role of large investors: controlling for financial development, bigger countries experience a stronger announcement effect, while financial development itself dampens it.
Erasmus Kersting (Kiel Institute; Villanova University, USA) — Christopher Kilby (Villanova University, USA).
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