Becoming a Multinational: an Analysis of Market Access and Risk through Mergers

Stefania Garetto and Jose Fillat

No 1546, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We examine more than 2,500 mergers that involve a US acquirer and a foreign target since 2001. Our analysis focuses on the comparison of the risk premium of US firms before and after they acquire a foreign firm for the first time. The objective of this study is to understand how foreign direct investment dynamics affect the risk premium of the acquiring firm by focusing on the merger event. In addition, our empirical analysis explores the characteristics of foreign investment that have a positive impact on risk premium. While there is strong evidence of the existence of a multinational risk premium, our analysis of firms' initial investment abroad shows that risk premia increase as the dates of announcement and completion of the deal approach. The risk premium in the quarters before announcement is significantly higher than the risk premium after the announcement and completion of the deal. This analysis motivates the construction of a model where firms' endogenous decisions to merge and agents' expectations generate a risk premium over firms that remain domestic only.

Date: 2017
New Economics Papers: this item is included in nep-upt
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