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

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  • Fillat, José L.
  • Garetto, Stefania
  • Oldenski, Lindsay

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.

Suggested Citation

  • Fillat, José L. & Garetto, Stefania & Oldenski, Lindsay, 2015. "Diversification, cost structure, and the risk premium of multinational corporations," Journal of International Economics, Elsevier, vol. 96(1), pages 37-54.
    • Handle: RePEc:eee:inecon:v:96:y:2015:i:1:p:37-54
    DOI: 10.1016/j.jinteco.2015.01.004
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    More about this item

    Keywords

    Multinational firms; Diversification; Risk premium; Stock returns;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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