The Limits of Financial Globalization



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    • *Reese Chair in Banking and Monetary Economics at the Ohio State University and Research Associate at the NBER. I am grateful to Warren Bailey, Steve Buser, Henrik Cronqvist, Harry DeAngelo, Linda DeAngelo, Craig Doidge, Vihang Errunza, Mara Faccio, Rudi Fahlenbrach, Eugene Fama, Peter Henry, David Hirshleifer, Steve Kaplan, Andrew Karolyi, Ravi Kumar, Anil Makhija, John Persons, Patricia Reagan, Andrei Shleifer, Frank Warnock, Ingrid Werner, Randy Westerfield, Rohan Williamson, Ishay Yafeh, and Luigi Zingales for comments and discussions. I also thank Kuan-Hui Lee and Carrie Pan for research assistance and Sandra Sizer for editorial assistance.

  • This is the text of my presidential address delivered to the membership of the American Finance Association in Philadelphia on January 8, 2005.


Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been surprisingly limited. I argue that country attributes are still critical to financial decision-making because of “twin agency problems” that 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.