The Impact of Globalization on the Equity Cost of Capital

47 Pages Posted: 6 May 2004

See all articles by Gikas A. Hardouvelis

Gikas A. Hardouvelis

University of Piraeus; Centre for Economic Policy Research (CEPR)

Richard Priestley

Norwegian Business School

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece

Date Written: April 2004

Abstract

The advent of the single currency within the European Union provides a natural experiment to measure how the cost of equity changes as globalization takes place. This is because the launch of the single currency has led to the elimination of currency-related restrictions on the composition of institutional investors' portfolios and, hence, to increased risk sharing among EU investors. We focus not only on the impact of globalization on the level of the cost of equity, but also on the cross-country and cross-sectoral dispersion in the cost of capital. Over the 1990s it is shown that the cost of equity within EU sectors falls by between 0.5 and 3 percentage points. There is strong evidence of convergence in the cost of equity across different countries in the same sector. Convergence across different sectors is small. An implication for portfolio management is that country effects are becoming smaller and sector effects larger.

Keywords: Globalization, cost of equity, convergence, integration

JEL Classification: G11, G12, G15

Suggested Citation

Hardouvelis, Gikas A. and Priestley, Richard and Malliaropulos, Dimitrios, The Impact of Globalization on the Equity Cost of Capital (April 2004). Available at SSRN: https://ssrn.com/abstract=541203

Gikas A. Hardouvelis (Contact Author)

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
+32010 4142323 (Phone)
+3210 6724848 (Fax)

HOME PAGE: http://www.eurobank.gr

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Richard Priestley

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
(+30) 210 3341527 (Phone)
(+30) 210 3341702 (Fax)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece
+30 1 3251133 (Fax)

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