Risk, Returns, and Multinational Production

Jose Fillat and Stefania Garetto

No wp2014-008, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: This paper starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than non-multinational firms. Within non-multinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to enter. Multinational firms are the most exposed due to the higher costs they have to pay to invest. The calibrated model is able to match both aggregate US export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.

Keywords: Multinational firms; option value; cross-sectional returns (search for similar items in EconPapers)
JEL-codes: F12 F23 G12 (search for similar items in EconPapers)
Date: 2014-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Risk, Returns, and Multinational Production (2015)
Working Paper: Risk, returns, and multinational production (2010)
Working Paper: Risk, Returns, and Multinational Production (2010)
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