Risk, returns, and multinational production

Jose Fillat and Stefania Garetto

No QAU10-5, Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston

Abstract: This paper starts by unveiling a new empirical regularity: multinational corporations systematically tend to exhibit higher stock market returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to exhibit higher earnings 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. Firms can serve the foreign market through trade or foreign direct investment, thus becoming multinationals. Multinational firms are more exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to start investing abroad. We calibrate the model to match U.S. export and FDI dynamics, and use it to explain cross-sectional differences in earnings yields and returns.

Keywords: International business enterprises; Stock - Prices (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Risk, Returns, and Multinational Production (2015)
Working Paper: Risk, Returns, and Multinational Production (2014)
Working Paper: Risk, Returns, and Multinational Production (2010)
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