Does the World Bank Move Markets

Abstract

This paper examines the impact of World Bank loans on borrowing country equity markets. We exploit a rich dataset with World Bank loan commitments and stock market returns at the monthly level, allowing us to study short run market reactions to news about loan commitments. Given ex ante uncertainty over the influx of resources, we expect a positive overall response to loan size in terms of the local stock market returns. To address potential endogeneity, we use a supply-push instrument based on countries' historic budget shares and the overall World Bank budget. Estimation results point to a sizable positive short run impact of World Bank loan commitments on local markets that may reduce the cost of capital for local entrepreneurs.

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