The globalization of stock markets and convergence in corporate governance

The international integration of financial markets is a central dy-namic of the globalization process and a potent force for driving changes in the institutions of corporate governance. During the late 1980s and 1990s, cross-border portfolio investment expanded dramatically. The number of regional and global investment funds focused on emerging markets increased from nine in 1986 to nearly 800 in 1995, and the combined assets of emerging market funds grew from $1.9 billion $132 billion during this time (World Bank 1997: 16). Conversely, the number of foreign companies listed on the two major U.S. stock markets (Nas-daq and the New York Stock Exchange) increased from roughly 170 in 1990 to over 750 in 2000.1 There are now more non-U.S. companies traded on Nasdaq and NYSE than there are German corporations traded on the Deutsche Borse. Some theorists have taken these trends to indi-cate a coming convergence in the institutions of corporate governance around the world, at either the national or the firm level (see Davis and Useem 2001 for a review). At the national level, states may adapt their system of corporate governance to the American model in order to achieve the growth benefits of “shareholder capitalism ” (e.g., Levine and Zervos 1998). As Larry Summers put it, “Financial markets don’t just oil the wheels of economic growth—they are the wheels ” (Murray 1997). Thus, forty-three nations opened their first postwar local stock exchange during the 1980s and 1990s, often as a means to attract for-eign portfolio investment in local companies (Weber and Davis 2000). At the firm level, managers of companies seeking to attract equity in-vestors have strong incentives to follow the standards of American insti-tutional investors for appropriate governance structures. The ultimate impact, according to enthusiasts, will be the worldwide dominance of the American model of how to finance and govern a corporation. Discussions of the “American model ” portray it as a blueprint for an institutional matrix oriented toward dispersed investors, from the proper way to compose a board of directors to how to generate shareholder-friendly bodies of corporate and securities law (Easterbrook and Fische