The Limits of Financial Globalization

René Stulz

No 11070, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been remarkably limited. I argue that country attributes are still critical to financial decision-making because of what I call the twin agency problems. These twin agency problems arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization. The twin agency problems help explain why the impact of financial globalization has been limited and why financial globalization can lead to capital flight and financial crises. The impact of financial globalization will remain limited as long as these agency problems are significant.

JEL-codes: F30 F36 G10 G32 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: AP CF
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Citations: View citations in EconPapers (461)

Published as René M. Stulz, 2005. "The Limits of Financial Globalization," Journal of Finance, American Finance Association, vol. 60(4), pages 1595-1638, 08.
Published as René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 8-15.

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Journal Article: The Limits of Financial Globalization (2007)
Journal Article: The Limits of Financial Globalization (2005)
Working Paper: The Limits of Financial Globalization (2005)
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