Working Paper: NBER ID: w11070
Authors: Ren M. Stulz
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.
Keywords: No keywords provided
JEL Codes: F36; F30; G32; G10; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| twin agency problems (D82) | ownership concentration (G32) |
| ownership concentration (G32) | economic growth (O49) |
| twin agency problems (D82) | economic growth (O49) |
| removing barriers to international investment (F21) | capital flight (F21) |
| capital flight (F21) | economic growth (O49) |