Explain several important events or changes that contributed to the globalization of financial and stock markets.
There are several important events or changes that have contributed to the globalization of financial and stock markets. These events include the formation of the IMF in 1945 when the first 29 countries signed the Articles of Agreement. The influence of IMF increased when African countries attained political independence and in 1991 the Soviet Union dissolved. The suspension of the Bretton Woods system in 1971 when the US government suspended the convertibility of the dollar into gold was an important milestone in the globalization of financial markets. Finally, the abandonment of the fixed exchange rates in 1973 was an important contribution to the globalization of financial markets. The increase in participation of trade by emerging economies from 19 percent of trade in 1971 to 29 percent in 1999 has played an important role in the globalization of financial markets. One of the strongest drivers of globalization of financial markets is the flow of private capital to developing countries. This increased during the 1990 and replaced development assistance. In this context, Foreign Direct Investment became an important factor that led to the globalization of financial markets and stock exchanges. The financial crisis during late 1990s has been responsible for slowing down of the globalization process. The migration of labor forces doubled between 1965 and 1990 leading to the need for global financial markets. After 1990 the growth of low cost communication networks especially using computer networks has led to an increase in the development of global financial markets and stock exchanges. The effects of the GATT and later the WTO have pulled down barriers of trade. This has helped grow the global financial markets and stock exchanges.
- How have these changes affected the capital structure of MNCs?
These changes have affected the capital structure of MNCs. The objective of management has been to show lower agency costs. This is achieved by increasing the proportion of debt in capital structure. The MNCs have a wide variety of choices for issuing bonds in different parts of the world. The increase in the proportion of debt in the capital structure has been moderated by the interest rates, tax rates, and foreign exchange rate fluctuation. The overall impact of the globalization of capital markets has led to an increase in the proportion of debt in the capital structure of MNCs.
- To what extent has globalization affected stock ownership and stock market activities?
Globalization has affected stock ownership and stock market activities in several ways. The stock owners can purchase and sell securities in any part of the world. An investor in stock has a wider choice of stocks. He can select attractive investment options from most stock exchanges in the world. In addition, the firms that enlist their stock on the stock exchanges can expect stock ownership from around the world. The stock ownership in most cases is less concentrated. Financial institutions and mutual funds hold stock from around the world. The stock exchanges have also adopted international standards and transparency so that global investors are attracted to the exchanges.
References:
(1)The Evidence and Impact of Financial Globalization, Gerard Caprio, Academic Press, 2012
(2)Handbook of Key Global Financial Markets, Institutions, and Infrastructure, Gerard Caprio, Academic Press, 2012