Globalization of Equity Markets and the Cost of Capital

René Stulz

No 7021, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1999-03
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-ifn
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Published as "Globalization of Capital Markets and the Cost of Capital: The Case of Nestle", JACF, Vol. 8, no. 3 (Fall 1995): 30-38.

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