This paper examines the relationship between capital account liberalization, legal and institutional development, and financial development, particularly in equity markets. Using a panel data analysis of 108 countries over a 20-year period (1980-2000), the authors explore several dimensions of the financial sector. They test whether financial openness leads to equity market development when controlling for the level of legal and institutional development. They also examine whether the opening of the goods sector is a prerequisite for financial sector liberalization and whether a well-developed banking sector is a prerequisite for financial liberalization to lead to equity market development. The empirical results suggest that financial openness contributes to equity market development only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Higher levels of bureaucratic quality, law and order, and lower corruption enhance the effect of financial openness on equity market development. Among emerging market countries, finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as general legal/institutional variables. The study also finds that liberalization in cross-border goods transactions is a prerequisite for capital account liberalization, and that the development of the banking sector is a prerequisite for equity market development, with both types of financial markets having synergistic effects.This paper examines the relationship between capital account liberalization, legal and institutional development, and financial development, particularly in equity markets. Using a panel data analysis of 108 countries over a 20-year period (1980-2000), the authors explore several dimensions of the financial sector. They test whether financial openness leads to equity market development when controlling for the level of legal and institutional development. They also examine whether the opening of the goods sector is a prerequisite for financial sector liberalization and whether a well-developed banking sector is a prerequisite for financial liberalization to lead to equity market development. The empirical results suggest that financial openness contributes to equity market development only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Higher levels of bureaucratic quality, law and order, and lower corruption enhance the effect of financial openness on equity market development. Among emerging market countries, finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as general legal/institutional variables. The study also finds that liberalization in cross-border goods transactions is a prerequisite for capital account liberalization, and that the development of the banking sector is a prerequisite for equity market development, with both types of financial markets having synergistic effects.