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  • René M. Stulz

    1. holds the Everett D. Reese Chair of Banking and Monetary Economics at The Ohio State University, and is a Research Associate of the NBER. He is also Editor of the Journal of Finance.*
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    This paper presents the implications for corporate finance of my working paper entitled “Globalization of Equity Markets and the Cost of Capital,” which is available at under the heading “working papers.” I am grateful for research assistance from Ed Gladewell, Jan Jindra, and Dong Lee; and for comments from Yakov Amihud, Bernard Dumas, Peter Henry, Andrew Karolyi, John McConnell, Nils Tuchschmid, Ingrid Werner, and participants at the NYSE-Bourse de Paris Conference on Global Equity Markets in Paris and the BSI Conference in Lugano. I also thank the New York Stock Exchange and the Bourse de Paris for financial support.


International financial markets are progressively becoming one huge, integrated, global capital market—a development that is contributing to higher stock prices in developed as well as developing economies. For companies that are large and visible enough to attract global investors, having a global shareholder base means having a lower cost of capital and hence a greater equity value for two main reasons:

First, because the risks of equity are shared among more investors with different portfolio exposures and hence a different “appetite” for bearing certain risks, equity market risk premiums should fall for all companies in countries with access to global markets. Although the largest reductions in cost of capital resulting from globalization will be experienced by companies in liberalizing economies that are gaining access to the global markets for the first time, risk premiums can also be expected to fall for firms in long-integrated markets as well.

Second, when firms in countries with less-developed capital markets raise capital in the public markets of countries (like the U.S.) with highly developed markets, they get more than lower-cost capital; they also import at least aspects of the corporate governance systems that prevail in those markets. For companies accustomed to less-developed markets, raising capital overseas is likely to mean that more sophisticated investors, armed with more advanced technologies, will participate in monitoring their performance and management. 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.

Besides reducing market risk premiums and improving corporate governance, globalization also affects the systematic risk, or “beta,” of individual companies. In global markets, the beta of a firm's equity depends on how the stock contributes to the volatility not of the home market portfolio, but of the world market portfolio. 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. Thus, to reflect the new reality of a globally determined cost of capital, all companies with access to global markets should consider using a global CAPM that views a company as part of the global portfolio of stocks. In making this argument, the article reviews the growing body of academic studies that provide evidence of the predictive power of the global CAPM as well as the reduction in world risk premiums.

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