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Globalization of Equity Markets and the Cost of Capital

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Rene M. Stulz

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7021.

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Date of creation: Mar 1999
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Handle: RePEc:nbr:nberwo:7021

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  32. Kadlec, Gregory B & McConnell, John J, 1994. " The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings," Journal of Finance, American Finance Association, vol. 49(2), pages 611-36, June. [Downloadable!] (restricted)
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