1. Topics 29. Globalization, Corporate Finance, and the Cost of Capital
R. M. Stulz
2018/12/6
Hu - Globalization

2. Globalization can increase firm value
Nestlé (A Swiss firm)
Before November 1988
Bearer shares: Available for both local and foreign investors
Registered shares: Available only for local investors
Same dividends, same voting rights
Registered shares price is only half of the bearer shares price
2018/12/6
Hu - Globalization

3. Globalization can increase firm value
Nestlé (A Swiss firm)
November 17, 1988
Company announced to remove ownership restriction
Announcement effect:
36% for registered share and -25% for bearer share
10% in total
2018/12/6
Hu - Globalization

4. Globalization can increase firm value
12 countries with capital market liberalization (Henry, 2000)
Average stock price increases 30% from four months before liberalization announcement to three months after that
ADR listing
1.2% - 2.6% around the announcement or listing
2018/12/6
Hu - Globalization

5. Globalization reduces the cost of capital
CAPM
E(Ri) = Rf + bi * [E(Rm) - Rf]
E(Ri): Expected return for firm I
Rf: Riskfree rate
bi: Market beta, which equals Cov(Ri, Rm) / Var(Rm)
E(Rm) – Rf: Market risk premium
2018/12/6
Hu - Globalization

6. Globalization reduces the cost of capital
Local CAPM
E(RC) = Rf + bH * [E(RH) - Rf]
Global CAPM
E(RG) = Rf + bG * [E(RG) - Rf]
E(RG) – Rf: Global market risk premium
Return of the Morgan Stanley Capital International world index
6.6% annual risk premium from 1970/2 to 1989/5
2018/12/6
Hu - Globalization

7. Globalization reduces the cost of capital
E(RG) < E(RC) because
[E(RG) - Rf] < [E(RH) - Rf]
bG < bH
2018/12/6
Hu - Globalization

8. Globalization reduces the cost of capital A lower market risk premium
[E(RG) - Rf] < [E(RH) - Rf]
Determined by risk and risk premium
Risk
The risk of global portfolio is smaller than the risk of home portfolio
Risk premium per unit of risk
Determined by investors’ risk attitude
The risk will be shared by more people who have different risk attitude
2018/12/6
Hu - Globalization

9. Globalization reduces the cost of capital
Giorgio de Santis and Bruno Gerard, 1997, International Asset Pricing and Portfolio Diversification with Time-Varying Risk, The Journal of Finance, Vol. 52, No. 5. (Dec., 1997), pp
2018/12/6
Hu - Globalization

10. Bekaert, Geert; Harvey, Campbell R
Bekaert, Geert; Harvey, Campbell R., 1997, Emerging equity market volatility, Journal of Financial Economics 43: 1, pp
2018/12/6
Hu - Globalization

11. Globalization reduces the cost of capital A lower market risk premium
[E(RG) - Rf] < [E(RH) - Rf]
Global portfolio is less correlated with personal human wealth
2018/12/6
Hu - Globalization

12. Globalization reduces the cost of capital
2018/12/6
Hu - Globalization

13. Globalization reduces the cost of capital A lower market beta
bG < bH
Nestlé bG = 0.6, bH = 0.9
2018/12/6
Hu - Globalization

14. Globalization reduces the cost of capital A lower transaction cost
Transaction cost and cost of capital
A lower transaction cost means a lower expected return required by investors
Globalization can reduce transaction costs
It can increase investor pool
It can reduce the probability of insider trading
Companies can choose the exchange with the lowest transaction cost
2018/12/6
Hu - Globalization

15. Globalization can also increase expected cash flows Better governance, stronger monitoring
Reduce information asymmetry
Reduce agency costs
Asset substitution
Underinvestment
Overinvestment
2018/12/6
Hu - Globalization

16. Globalization can also increase expected cash flows Better governance, better monitoring
Board
Using foreigners
A greater pool of talents
Capital market
Using outside professionals, e.g., investment banks
Global knowledge
Higher reputation to protect
2018/12/6
Hu - Globalization

17. Globalization can also increase expected cash flows Better governance, better monitoring
Legal system
Limit on expropriation from major shareholders
Class actions
Provide mechanism for shareholder monitoring
Active shareholders
Large shareholders
Institutional shareholders
2018/12/6
Hu - Globalization

18. Institutional investors’ view
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
2018/12/6
Hu - Globalization

19. Institutional investors’ view
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
2018/12/6
Hu - Globalization

20. Institutional investors’ view
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
2018/12/6
Hu - Globalization

21. Institutional investors’ view
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
2018/12/6
Hu - Globalization

22. Institutional investors’ view
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002
2018/12/6
Hu - Globalization

23. Standard and Poor’s criteria
Ownership Structure and External Influences
Transparency of Ownership Structure
Concentration and Influence of Ownership and External Stakeholders
Shareholder Rights and Stakeholder Relations
Shareholder Meeting and Voting Procedures
Ownership Rights and Takeover Defenses
Stakeholder Relations
Transparency, Disclosure and Audit
Content of Public Disclosure
Timing of, and Access to, Public Disclosure
The Audit Process
Board Structure and Effectiveness
Board Structure and Independence
Role and Effectiveness of the Board
Director and Senior Executive Compensation
2018/12/6
Hu - Globalization

24. Globalization can also increase expected cash flows Better governance, better monitoring
Market for corporate control
Greater competition for control
Greater pressure to open the market for control
Disclosure
Transparency
Cross-listing or listing in foreign exchanges can commit to disclose
2018/12/6
Hu - Globalization

25. Companies need to choose
Globalization can also increase expected cash flows Better governance, better monitoring
Companies need to choose
Companies that participate global market
Companies that do not participate
2018/12/6
Hu - Globalization

26. Globalization reduces transaction costs
2018/12/6
Hu - Globalization

27. Globalization reduces the cost of capital
2018/12/6
Hu - Globalization

28. Globalization reduces the cost of capital
2018/12/6
Hu - Globalization