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The Comovement of Returns and Investment Within the Multinational Firm

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  • Mihir A. Desai
  • C. Fritz Foley
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    Abstract

    Can financial integration, particularly the cross-border investments of multinational firms, help explain the synchronization of business cycles? This paper presents evidence on the comovement of returns and investment within U.S. multinational firms to address this question. These firms constitute significant fractions of economic output and investment in most large economies, suggesting that they could create significant economic linkages. Aggregate measures of rates of return and investment rates of U.S. multinational firms located in different countries are highly correlated across countries. Firm-level regressions demonstrate that rates of return and investment rates of affiliates are highly correlated with the rates of return and investment of the affiliate's parent and other affiliates within the same parent system, controlling for country and industry factors. The evidence on these interrelationships and the importance of multinationals to local economies suggests that global firms may be an important channel for transmitting economic shocks. This evidence also sheds light on asset pricing puzzles related to the diversification benefits provided by multinational firms.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10785.

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    Date of creation: Sep 2004
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    Publication status: published as Mihir A. Desai, C. Fritz Foley. "The Comovement of Returns and Investment within the Multinational Firm," in Richard H. Clarida, Jeffrey Frankel, Francesco Giavazzi and Kenneth D. West, editors, "NBER International Seminar on Macroeconomics 2004" The MIT Press (2006)
    Handle: RePEc:nbr:nberwo:10785

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    Cited by:
    1. Paolo Panteghini, 2009. "The capital structure of multinational companies under tax competition," International Tax and Public Finance, Springer, vol. 16(1), pages 59-81, February.
    2. Buch, Claudia M. & Lipponer, Alexander, 2005. "Business cycles and FDI: evidence from German sectoral data," Discussion Paper Series 1: Economic Studies 2005,09, Deutsche Bundesbank, Research Centre.
    3. Burstein, Ariel & Kurz, Christopher & Tesar, Linda, 2008. "Trade, production sharing, and the international transmission of business cycles," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 775-795, May.
    4. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2007. "FDI Determination and Corporate Tax Competition in a Volatile World," CESifo Working Paper Series 1965, CESifo Group Munich.
    5. Diemo Dietrich, 2006. "Asset Tangibility and Capital Allocation within Multinational Corporations," IWH Discussion Papers 4, Halle Institute for Economic Research.
    6. Paolo Panteghini & Guttorm Schjelderup, 2006. "To Invest or not to Invest: A real options approach to FDIs and tax competition," International Tax and Public Finance, Springer, vol. 13(6), pages 643-660, November.

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