4.1 The Limits of Financial Globalization Flashcards
4.1 The Limits of Financial Globalization
The podcast discusses Rene Stultz’s “Limits to Financial Globalization” (2022), where he argues that financial globalization’s impact on global markets has been limited by “twin agency problems”: corporate insiders exploiting minority shareholders and state rulers expropriating wealth. These issues result in concentrated ownership, restricted risk-sharing, and capital flows, preventing the convergence of corporate financial policies. However, Stultz suggests financial globalization can eventually reduce these problems by lowering external finance costs, improving governance, and offering investors an exit when faced with expropriation.
Why does Stulz argue that the benefits of financial globalization might be underestimated when focusing solely on financial flows?
Because it ignores the potential for capital flight and competition to improve governance
What are the “twin agency problems” described by Stulz?
Expropriation of wealth by corporate insiders and state rulers
How do the twin agency problems affect the ability of firms to attract investment capital?
They make it difficult to attract investment as outside investors fear expropriation
What is “home bias” in investment?
The preference of investors to invest a disproportionately large share of their portfolio in domestic assets.
How does the threat of expropriation by state rulers affect corporate insiders? **
It encourages corporate insiders to increase their ownership stake to signal commitment
How do the twin agency problems affect the cost of capital for firms?
They limit the benefits of financial globalization by making outside investors hesitant
Financial Globalization
The increasing integration and interdependence of national financial markets through cross-border capital flows, foreign investment, and financial innovation.
Agency Problem
A conflict of interest that arises when one party (the agent) is entrusted to act in the best interests of another party (the principal) but has incentives to act in their own self-interest instead.
How might the twin agency problems influence a company’s capital structure?
They lead to higher leverage, as debt reduces expropriation risk
Expropriation
The act of a government or other authority taking property from its owner for public use or benefit, sometimes without fair compensation. In the context of the article, it also refers to actions by corporate insiders that unfairly diminish the wealth of minority shareholders.
Home Bias
The tendency of investors to overweight domestic assets (like stocks and bonds) in their portfolios, even when international diversification might offer better risk-adjusted returns.
Capital Structure
The mix of debt and equity financing that a company uses to fund its operations and growth.
Leverage
The use of borrowed money (debt) to finance assets. Companies with higher leverage have a larger proportion of debt in their capital structure.
Corporate Governance
The system of rules, practices, and processes by which a company is directed and controlled. Good corporate governance ensures accountability and fairness to all stakeholders.
