The capital is the lifeblood of any company and the major constraint for the entrepreneurs because of the limitation of the sources through which they can raise capital. Raising equity and debt is believed to be the life of the economy. Raising money from the local citizens is a remarkable act but it seems to be miracle to raise money from the foreigners and this is what the globalization aims at. During the recent decades, the cross-border financial flows have been steadily increasing around the world. With the tight integration of the world’s economy, there has been an increase in the capital flows across the borders especially due to the advancements in technology and the ease in access to the new markets (Stulz, 2009). First of all, several financial institutions which also include the banks as well as the institutional investors have expanded globally. In order to do this, they played the role of an intermediary between the lenders and the borrowers for funding across the national borders. Secondly, the securities markets have gained a clear orientation of working across the border such that they tend to maximize the offer for the foreign investors.
There are many economic benefits associated with the globalization of the financial markets; practically, it can be implied that as the financial markets become globally integrated, they ensure the provision of more flexible ways for financing. In addition, there are other benefits too like the increase in the spread of technological advancements, financial innovation and also financial performance across the globe. The major effects of the globalization of the financial markets on the businesses are two-fold: firstly, it impacts the cost of capital for the firm and secondly it impacts the corporate governance practices.
The cost of capital of the firm is impacted by the globalization due to the reason that it tends to alter the risk of the investment of the firm (Anand, 2008). When an economy opens its markets for the foreign investors and allow its domestic investors to invest in foreign markets, the risk would be diversified. As the competition would increase, the risk of the domestic investments would be diversified; the investors would diversify the variability of returns as it would then contribute less to the total portfolio of the investor (Bhattacharya and Bonser-Neal, 2003). It can also be said that with the globalization, the perception of the investors regarding their investment risks are altered. Due to the globalization, the investment opportunities increase which allow the investors to diversify their risks; this leads to the fall of the cost of capital for the firm while raising the price of the stock. As the cost of capital falls, the firms would be open to several benefits. The projects that were earlier perceived as being unprofitable would be identified as profitable. There would be an increase in the attractiveness of the projects to be invested in and so the industry would spur great investments (DRAGOTUA and BADARAU et al., 2013).
In other words, it can be said that the capital structure of the firm is changed due to this globalization.
The second major impact on the globalization of the financial markets for the businesses is on the international corporate governance. First of all, the owners are represented by the board of directors who tend to monitor the management; the schemes of managerial compensation are also designed by them. With the increase in globalization, the desirability of the independence of the board has increased. Throughout the world, the codes of best practices focus on increase in the number of representatives who are non-executive directors. Due to the globalization, the foreign investors buy significant shares in firm which result in the power to monitor management. Public disclosure is a critical subject in law and firm-specific information must be disclosed to the stakeholders. It is due to the globalization, that the demand for transparent and good information has increased for the foreign firms because the investors demand a high return on investment when they have lesser information (Errunza and Miller, 2000). So, it can be said that due to the globalization of the financial markets, there has been an improvement in the corporate governance such that the actions of the managers are more aligned with the interests of the shareholders.
The stock markets of the world are also moving towards globalization such that the local financial markets become integrated into the international system of financial institutions through the transactions taking place across the borders. The major factors that contributed to the globalization of the stock markets includes the technological advancements, and the emergence of new financial institutions globally which have enhanced liberalization and removed the restrictions of ownership (Esqueda and Assefa et al., 2012).
There are many benefits due to this phenomenon as the national economies are enhanced but it can also result in the increase in the volatility of the price and instability of the trade because the crisis situation in one market would move towards the other markets too (Ramch and Susmel, 1998). As the stock markets adopted the environment of globalization, they had to face numerous challenges which include: instability and reduction in efficiency of the global stock markets; this included the fragmentation of the market, inefficiency of the stock markets to be globally integrated, destruction of the market efficiency and the most important challenge for the stock markets has been something else (Sabri, 2006). As they expanded globally, new practices and legal changes were introduced which had adverse impacts on the stock markets. Another research found that as the financial markets become more integrated, the volatility of the stock tends to be lowered and so they become less strong which means that the turnover would not be improved (Sabri, 2004).
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Bhattacharya, U. and Bonser-Neal, C. (2003). The effect of global financial markets on businesses. Research in Global Strategic Management, 8 pp. 163--174.
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Errunza, V. and Miller, D. (2000). Market segmentation and the cost of the capital in international equity markets. Journal of Financial and Quantitative analysis, 35 (04), pp. 577--600.
Esqueda, O., Assefa, T. and Mollick, A. (2012). Financial globalization and stock market risk. Journal of International Financial Markets, Institutions and Money, 22 (1), pp. 87--102.
Ramch and Susmel, R. (1998). Volatility and cross correlation across major stock markets. Journal of Empirical Finance, 5 (4), pp. 397--416.
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Sabri, N. (2006). Globalization and Stock Market Stability. Available at SSRN 899708.
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