The Limits of Financial Globalization

60 Pages Posted: 16 Feb 2005 Last revised: 2 Apr 2021

See all articles by René M. Stulz

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: January 2005

Abstract

Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been remarkably limited. I argue that country attributes are still critical to financial decision-making because of what I call the twin agency problems. These twin agency problems 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. The twin agency problems help explain why the impact of financial globalization has been limited and why financial globalization can lead to capital flight and financial crises. The impact of financial globalization will remain limited as long as these agency problems are significant.

Suggested Citation

Stulz, Rene M., The Limits of Financial Globalization (January 2005). NBER Working Paper No. w11070, Available at SSRN: https://ssrn.com/abstract=652364

Rene M. Stulz (Contact Author)

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