The Impact of Globalization on the Equity Cost of Capital

This paper investigates the effect of stock market integration in Europe on the cost of equity capital. Over the 1990s it is shown that the cost of equity within European Union sectors falls by between 0.5 and 3 percentage points. There is strong evidence of convergence in the cost of equity across different countries in the same sector. However, convergence across different sectors is small. An implication of this is that country effects are becoming smaller and sector effects larger as stock market integration increases.