THE JOURNAL 5>OF FINANCE * VOL. LV, NO. 2 * APRIL 2000 Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices PETER BLAIR HENRY* ABSTRACT A stock market liberalization is a decision by a country’ s government to allow foreigners to 4>purchase 6>shares 7>in that country’ s stock market. On average, a coun- try’ s aggregate equity price index experiences abnormal returns of 3. 3 percent per month in real dollar terms during an eight-month window leading up to the im-plementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock mar- ket liberalization may reduce the liberalizing country’ s cost of equity capital by allowing 1>for risk sharing between domestic and foreign agents. A stock market liberalization is a decision by a country’ s government to allow foreigners to purchase shares in that country’ s stock market. Standard international asset pricing models (JAPMs) predict that stock market liber- alization may reduce the liberalizing country’ s cost of equity capital by al- lowing for risk sharing between domestic and foreign agents (Stapleton and Subrahmanyan (1977) , Errunza and Losq (1985) , Eun and Janakiramanan (1986) , Alexander,Eun, and Janakiramanan (1987) , and Stulz (1999a, 1999b) ) . This prediction has two important empirical implications for those emerg- ing countries that liberalized their stock markets in the late 1980s and early 1990s.