Diversification, cost structure, and the risk premium of multinational corporations

Jose Fillat, Stefania Garetto and Lindsay Oldenski

Journal of International Economics, 2015, vol. 96, issue 1, 37-54

Abstract: We investigate theoretically and empirically the relationship between the geographic structure of a multinational corporation and its risk premium. Our structural model suggests two channels. On the one hand, multinational activity offers diversification benefits: risk premia should be higher for firms operating in countries where shocks co-vary more with the domestic ones. Second, hysteresis and operating leverage induced by fixed and sunk costs of production imply that risk premia should be higher for firms operating in countries where it is costlier to enter and produce. Our empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries' contributions.

Keywords: Multinational firms; Diversification; Risk premium; Stock returns (search for similar items in EconPapers)
JEL-codes: F14 F23 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Working Paper: Diversification, Cost Structure, and the Risk Premium of Multinational Corporations (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:96:y:2015:i:1:p:37-54

DOI: 10.1016/j.jinteco.2015.01.004

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