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Globalization of Equity Markets and the Cost of Capital

70 Pages Posted: 13 Oct 2010 Last revised: 12 Jul 2014

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: March 1999

Abstract

This paper examines the impact of globalization on the cost of equity capital. We argue that the cost of equity capital decreases because of globalization for two important reasons. First, the expected return that investors require to invest in equity to compensate them for the risk they bear generally falls. Second, the agency costs which make it harder and more expensive for firms to raise funds become less important. The existing empirical evidence is consistent with the theoretical prediction that globalization decreases the cost of capital, but the documented effects are lower than theory leads us to expect. We discuss various reasons for why this is the case.

Suggested Citation

Stulz, René M., Globalization of Equity Markets and the Cost of Capital (March 1999). NBER Working Paper No. w7021. Available at SSRN: https://ssrn.com/abstract=1691284

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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