Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%

Topic:

Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%

Time&Date: 

 10:00-11:15 am, 2019/11/8 (Friday)

Venue:

 Room 619, Teaching A

Speaker:

Prof. Hong Zhang (PBC School of Finance at Tsinghua University)

Abstract:

Although financial globalization related to foreign direct investment is known to enhance income inequality, we document a surprising finding that foreign indirect investment delegated through the global mutual fund industry can actually reduce the income of the top 1% as reported by the World Wealth and Income Database. To rationalize this observation, we construct a novel database of worldwide ownership of rich families for both private and publicly listed firms for the 2001─2013 period, which allows us to measure income inequality as the fraction of sales revenues accrued to rich families in each country-industry. We find that large inflows of delegated foreign portfolio flows induce local ultimate owners to rebalance their assets, which triggers a misallocation problem in that rich families tend to sell industries that can subsequently outperform their holding ones. By contrast, delegated domestic portfolio flows and a list of alternative mechanisms, including corporate governance, taxation, labor market conditions, technology shocks, education, financial development, and liquidity, fail to generate/explain the phenomenon. Our results have important normative implications in that we show financial globalization might have an intriguing impact on the issue of income inequality through their influence on the top 1%.