Discussion Paper Details

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Title: The Impact of Globalization on the Equity Cost of Capital

Author(s): Gikas A Hardouvelis, Dimitrios Malliaropoulos and Richard Priestley

Publication Date: April 2004

Keyword(s): convergence, cost of equity, globalization and integration

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Hardouvelis, G, Malliaropoulos, D and Priestley, R. 2004. 'The Impact of Globalization on the Equity Cost of Capital'. London, Centre for Economic Policy Research.