GLOBALIZATION OF CAPITAL MARKETS AND THE COST OF CAPITAL: THE CASE OF NESTLÉ

BANK OF AMERICA JOURNAL OF APPLIED CORPORATE FINANCE apital markets have become increasingly global over the last 20 years. While providing world investors with opportunities to diversify beyond their home markets, the progressive integration of international financial markets is also bringing about a significant reduction in the cost of capital of public corporations around the world. And a lower cost of capital, for a given level of expected corporate profits, means a higher stock price. Although such an effect is most pronounced for multinationals based in small countries with limited capital markets, even wholly domestic (though mainly large) firms in well-established financial markets like the U.S. and U.K. are benefiting from this development. Nevertheless, assessing the effect of the globalization of capital markets on capital costs is not a simple matter. In fact, global integration of markets can be seen as having two directly opposite effects on the cost of equity capital. On the one hand, the removal of barriers to foreign investment means that the risk premiums on securities in general are falling because the risk of these securities can be shared among more investors—and more efficient spreading of risks among investors with globally diversified portfolios means lower required returns and thus higher stock prices. At the same time, however, the increasing integration of both capital markets and real business activity resulting from continued overseas expansion by multinationals implies a greater degree of synchronization among various international capital markets—that is, a greater tendency for all markets to move together. And such greater C