Diversification, Cost Structure, and the Risk Premium of Multinational Corporations

Jose Fillat, Stefania Garetto and Lindsay Oldenski

No WP2014-007, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

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 covary more with the domestic ones. Second, hysteresis and potential losses 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. 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)
Pages: 45 pages
Date: 2014-05
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Citations: View citations in EconPapers (4)

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Journal Article: Diversification, cost structure, and the risk premium of multinational corporations (2015)
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