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The Euro is Good After All: Evidence from Corporate Valuations

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  • Bris, Arturo
  • Koskinen, Yrjö
  • Nilsson, Mattias

Abstract

In this Paper we study the changes in corporate valuation induced by the formation of Economic and Monetary Union (EMU) in Europe. We use corporate-level data from ten countries that adopted the euro, the three EU countries that did not join EMU, as well as Norway and Switzerland. We show that the introduction of the euro has increased Tobin's Q-ratios in EMU countries by 7.4%. The effects prevail even if we account for the decrease in long-term interest rates. The increases in Tobin's Q are larger for firms that are ex-ante expected to benefit more, i.e. firms from countries that had weak currencies and firms that were exposed to intra-European currency risks. Finally, the increases are also more significant for firms that are financially unconstrained. The evidence provided here supports the view that the introduction of the euro has lowered firms' cost of capital in EMU-countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3910.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3910

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Keywords: cost of capital; currency risk; currency union; economic and monetary union (EMU); the euro; valuation;

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Cited by:
  1. Francis, Bill B. & Hunter, Delroy M., 2004. "The impact of the euro on risk exposure of the world's major banking industries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(7-8), pages 1011-1042.
  2. Baggs, Jennifer & Brander, James A., 2005. "Liberalisation des echanges, rentabilite et levier financier," Direction des etudes analytiques : documents de recherche 2005256f, Statistics Canada, Direction des etudes analytiques.
  3. Pungulescu, Crina & Tümer Alkan, Günseli, 2009. "The Euro And Corporate Valuations: The Case Of Greece," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", Centre of Financial and Monetary Research "Victor Slavescu", vol. 13(1), pages 131-152, March.
  4. Jen Baggs & James A Brander, 2006. "Trade liberalization, profitability, and financial leverage," Journal of International Business Studies, Palgrave Macmillan, vol. 37(2), pages 196-211, March.

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