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The Impact of Globalization on the Equity Cost of Capital

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  • Hardouvelis, Gikas A
  • Malliaropoulos, Dimitrios
  • Priestley, Richard

Abstract

The advent of the single currency within the European Union provides a natural experiment to measure how the cost of equity changes as globalization takes place. This is because the launch of the single currency has led to the elimination of currency-related restrictions on the composition of institutional investors’ portfolios and, hence, to increased risk sharing among EU investors. We focus not only on the impact of globalization on the level of the cost of equity, but also on the cross-country and cross-sectoral dispersion in the cost of capital. Over the 1990s it is shown that the cost of equity within EU sectors falls by between 0.5 and 3 percentage points. There is strong evidence of convergence in the cost of equity across different countries in the same sector. Convergence across different sectors is small. An implication for portfolio management is that country effects are becoming smaller and sector effects larger.

Suggested Citation

  • Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 2004. "The Impact of Globalization on the Equity Cost of Capital," CEPR Discussion Papers 4346, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4346
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cauchie, Severine & Hoesli, Martin & Isakov, Dusan, 2004. "The determinants of stock returns in a small open economy," International Review of Economics & Finance, Elsevier, pages 167-185.
    2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2008. "International Investment Patterns," The Review of Economics and Statistics, MIT Press, pages 538-549.
    3. Dvorak, Tomas & Podpiera, Richard, 2005. "European Union enlargement and equity markets in accession countries," Working Paper Series 552, European Central Bank.
    4. Arturo Bris & Yrjö Koskinen & Mattias Nilsson, 2009. "The Euro and Corporate Valuations," Review of Financial Studies, Society for Financial Studies, pages 3171-3209.
    5. Werner Roeger & Janos Varga & Jan in 't Veld, 2010. "How to close the productivity gap between the US and Europe: A quantitative assessment using a semi-endogenous growth model," European Economy - Economic Papers 2008 - 2015 399, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Werner Roeger & Janos Varga & Jan in 't Veld, 2008. "Structural Reforms in the EU: A simulation-based analysis using the QUEST model with endogenous growth," European Economy - Economic Papers 2008 - 2015 351, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    convergence; cost of equity; globalization; integration;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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