Multinational corporations see both benefits and downsides of globalization. In the united states corporate finance refers to the strategies, techniques and financial processes used to acquire, manage, and utilize capital assets. Financial inter mediaries may help reduce monitoring costs, thereby providing additional means for. Globalization of capital markets and the asian financial crisis by e. To narrow the scope of the inquiry, we ignore exchange rates and assume that m oney markets are internationally integrated. Globalization, defined as increasing trade and financial openness, has increased significantly over the past two decades, with a particularly sharp pickup in capital flows or financial globalization in recent years. The cost of capital is the companys cost of using funds provided by creditors and shareholders. Reply in this reply to the two preceding comments, we shall concentrate on certain issues raised by david durand.
Stulz, ohio state university bank of america journal of applied corporate finance hen malaysia imposed its restrictions on capital flows last year, the world financial community was stunned. The cost of capital, corporation finance and the theory of investment franco modigliani. The impact of investability on asset valuation journal. We employ a set of global tourism companies and find that mandatory ifrs adoption has a significantly negative relation with the cost of equity capital. Global development horizons capital flows in the third age of financial globalization 117 sveral key messages emerge from the chapter. Globalization of equity markets and the cost of capital rene m. The sum of foreign assets and foreign liabilities expressed as a ratio to gdp and termed. Effects of financial globalization on developing countries. Pdf finance, globalisation and economic development.
Recent work by jones 2014 and lucas 2015 goes so far as to suggest that differences in the stock of human capital could account for potentially all of the crosscountry variation in incomes between rich and poor countries. Our central findings indicate that policies promoting financial sector development, institutional quality and trade. Pdf golbalization, corporate finance, and the cost of. Globalization of capital markets and the cost of capital.
The globalization of corporate finance in developing countries. Reese chair of banking and monetary economics at the ohio state university, and is a research associate of the nber. Ayhan kose, eswar prasad, kenneth rogoff, and shangjin wei the literature on the bene. In other words, we proceed as if there are one currency and one interest rate and focus on the question of how globalization of equity markets affects the cost of capital. To date international business ib scholars have developed a rich tradition of research on how globalization of product markets may affect a firms organizational form and business strategy. Ayan kose 2003 international monetary fund september 9, 2003. In our theoretical model, if investor protection is weak, wealthy investors have an incentive to become controlling shareholders. This paper discusses the benefits and risks that financial globalization entails for developing countries. The purpose of the financial manager and other professionals in the corporate finance domain is twofold. We study the effects of investor protection on stock returns and portfolio allocation decisions. As a firm increases its leverage, the cost of equity will increase just enough to offset. The cost of capital, corporation finance and the theory of investmient by franco modiglian1 and merton h. At the same time, the structure and operation of world financial markets have been transformed. International corporate financeoffers thorough coverage of the.
Financial globalization can lead to large benefits, particularly to the development of the financial system. Globalization or globalisation is the process of interaction and integration among people, companies, and governments worldwide. Olney1 april 2010 abstract workers are becoming increasingly concerned about the impact that globalization has on their domestic labor market. Consequences of financial globalization on the economy. Chapter 1 history of financial globalization, overview. Risk premium for firm before globalization where risk premium for firm after globalization possible for cost of capital to increase with but if risk premium for countrys market portfolio falls, then valueweighted avg of firms risk premiums must fall, so a firm with higher cost of capital is outlier. The impact of globalization on the equity cost of capital. Globalization of equity markets and the cost of capital duke fuqua.
This paper presents the implications for corporate finance of my working paper entitled globalization of equity markets and the cost of capital, which is. Could cost of capital increase for some firms even though it falls for country. First, the expected return that investors require to invest in equity to compensate them for the risk they bear generally falls. A disadvantage is that coordination can be harder with different languages and cultural norms. This article answers the question of whether the adoption of international financial reporting standards ifrs reduces the cost of equity capital, with a focus on the tourism industry. The twin forces of internationalization of business activity and integration of financial markets are pushing companies to minimize their cost of capital by diversifying their funding sources, building a long. In the past, aes used the same cost of capital for all of its capital budgeting, but the companys international expansion has raised questions about this approach and whether a single cost of capital adequately accounts for the different risks aes faces in its diverse businesses and diverse environments. The cost of capital of the firm will not change with leverage. The corporate finance domain is like a liaison between the firm and the capital markets. We argue that the cost of equity capital decreases because of globalization for two important reasons.
That situation and those views changed dramatically in the 1970s, and the pace of change accelerated in the 1980s. The cost of capital, corporation finance, and the theory of investment. Globalization, corporate finance, and coordinated capitalism. Rose we can only apologize for having led him astray by our failure to adjust explicitly the definition of a. Second, integration of financial markets has important implica tions for asset. We argue that the cost of equity capital decreases because of globalization for t. Globalization, financial markets, and fiscal policy. Firstly, they need to ensure that the firm has adequate finances and that they are using the right sources of funds that have the minimum costs. Globalizing the cost of capital and capital budgeting at aes. Pdf this paper discusses the benefits and risks that financial globalization. Does ifrs adoption decrease the cost of equity of the. The integration of international capital markets makes it easier for firms to access capital outside of their home countries. Does ifrs adoption decrease the cost of equity of the global.
The introduction of the euro in 1999, in addition, contributed to internalization of. After a decade of aftershocks from the seismic financial crisis of 2007, the landscape of global finance is much altered. In the past, aes used the same cost of capital for all of its capital budgeting, but the companys international expansion has raised questions about this approach and whether a single cost of capital adequately accounts for the different risks aes. Pension finance in germany and japan article pdf available january 2001 with 31 reads how we measure reads. Human capital ranks among the most important determinants of growth and income. A companys cost of capital is the cost of its longterm sources of funds. The impact of globalization on the equity cost of capital gikas hardouvelis, dimitrios malliaropulos and richard priestley abstract. A thorough introduction to corporate finance from a renowned professor of finance and banking as globalization redefines the field of corporate finance, international and domestic finance have become almost inseparably intertwined. The low cost of capital and an increase in capital raisings were especially prominent, relatively speaking, for developing countries because of a rapid pace of financial liberalization in emerging markets of latin america, east asia, and eastern europe.
The impact of globalization on the equity cost of capital fondation. Jul 11, 2016 in the united states corporate finance refers to the strategies, techniques and financial processes used to acquire, manage, and utilize capital assets. Schmukler argue that one possible negative spillover suggested is the migration of activity to international markets, reducing the. Investor protection, equity returns, and financial globalization. Islamic financeunderstood as achieving maximum risk sharingdiversifies risk and allows it to be shared widely. Globalization of equity markets and the cost of capital by rene m. Pdf globalization, corporate finance, and coordinated.
We outline the policy reforms required at national and international levels in section 4. Globalization and corporate finance richard surber. The american economic revlew volume xlviii june 1958 number three the cost of capital, corporation finance and the theory of investmient by franco modiglian1 and merton h. Its increasingly difficult to understand what is happening in capital markets without a firm grasp of currency markets, the investment strategies of sovereign. With the support of the bureau of economic analysis bea of the u. Globalization of equity markets and the cost of capital nber. Globalization, corporate finance, and the cost of capital. This is why international corporate finance is a must text for upperundergraduates, mbas aspiring to careers in global financial services and budding finance professionals. Investor protection, equity returns, and financial globalization volume 45 issue 1 mariassunta giannetti, yrjo koskinen skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. Golbalization, corporate finance, and the cost of capital golbalization, corporate finance, and the cost of capital stulz, rene m.
As globalization is redefining the field of corporate finance, international finance is now part and parcel of the basic literacy of any financial executive. The globalization of corporate finance in developing. Sweeping changes in corporate governance and globalization of the capital markets have made the language and issues of modern corporate financepreviously left to finance executives and investment bankersa critical point of accountability for all senior executives and board directors. Globalization of equity markets and the cost of capital. Maurice obstfeld university of california, berkeley, cepr, and nber alan m. Han kim, university of michigan 30 bank of america journal of applied corporate finance earlier versions of this article were presented as a keynote speech at the first joint conference of the nfa nippon finance association and apfa asiapacific. The role of institutions chapter pdf available january 2010 with 1,225 reads how we measure reads.
Asset pricing, corporate finance this paper examines the impact of globalization on the cost of equity capital. Some of the financial activities that are involved in corporate finance include. This issue is of particular importance for both corporate managers. On the positive side are an increased access to markets, more labor options, partnership opportunities and possibly lower taxes. For companies with access to global capital markets whose profitability is tied more closely to the local than to the global economy, use of the traditional capital asset pricing model capm will overstate the cost of capital because risks that are not diversifiable within a national economy can be diversified by holding a global portfolio. Crossborder capital flows have fallen 65 percent since the financial crisis as global banks retrenched, but a more stable form of financial globalization is emerging. Besides reducing market risk premiums and improving corporate governance, globalization also affects the systematic risk, or beta, of individual companies. Over the 1990s it is shown that the cost of equity within european union sectors falls by between 0. Globalization and financial deepening have substantial macroeconomic and fiscal implications. And the cost of each source reflects the risk of the assets the company invests in. Journal of applied corporate finance globalization, corporate finance, and the cost of capital by rene m. This paper examines the impact of globalization on the cost of equity capital. The case of nestle, journal of applied corporate finance, 1995, v83,fall, 3038. Order information full text of march 17, 2003 imf board document is also available.
The cost of capital, corporation finance and the theory of. While existing research typically focuses on the e. Golbalization, corporate finance, and the cost of capital. Order information full text of march 17, 2003 imf board document is. The cost of capital, corporation finance, and the theory. Cost of capital the challenges of low interest rates, populism, and new technologies guest commentary by stefan hofrichter, allianz global investors gmbh cost of capital comparative measures in a world that increasingly defies comparison new valuation methods in disruptive times. The cost of capital, corporation finance, and the theory of. Capital flows in the third age of financial globalization.
Taylor university of california, davis, and nber february 2002. Emerging capital markets and globalization publications. Journal of applied corporate finance ohio state university. Trends, risks and prevention 5 latter half of 1990, this proportion had already reduced to 0. Rose we can only apologize for having led him astray by. The new dynamics of financial globalization mckinsey. And, in a virtuous cycle, more effective monitoring increases investor confidence in the future performance of those companies and so improves the terms on which they raise capital. Investor protection, equity returns, and financial. Neal columbia university, new york, ny, usa university of illinois at urbanachampaign, columbus, oh, usa outline references 14 financial globalization appears to be a recent phe. This paper was prepared for the nber conference globalization in historical perspective. Effects of financial globalization on developing countries some empirical evidence eswar s. Consequences of financial globalization and its impact on the world economy. Risk premium for firm before globalization where risk premium for firm after globalization possible for cost of capital to increase with but if risk premium for countrys market portfolio falls, then valueweighted avg of firms risk premiums must fall, so a firm with higher cost of.
1090 1439 1344 171 1328 501 89 1096 1597 1490 680 10 806 268 50 372 694 717 1540 288 1008 280 1066 476 117 230 493 1080 346 439