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Diversification, Cost Structure, and the Risk Premium of Multinational Corporations

Author

Listed:
  • Jose L. Fillat

    (Federal Reserve Bank of Boston)

  • STEFANIA GARETTO

    () (Department of Economics, Boston University)

  • Lindsay Oldenski

    (Georgetown University)

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 covary more with the domestic ones. Second, hysteresis and potential losses 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. Our empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries’ contributions.

Suggested Citation

  • Jose L. Fillat & STEFANIA GARETTO & Lindsay Oldenski, 2014. "Diversification, Cost Structure, and the Risk Premium of Multinational Corporations," Boston University - Department of Economics - Working Papers Series WP2014-007, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2014-007
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    File URL: http://www.bu.edu/econ/files/2009/07/FGO_May2014.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. José L. Fillat & Stefania Garetto, 2015. "Risk, Returns, and Multinational Production," The Quarterly Journal of Economics, Oxford University Press, vol. 130(4), pages 2027-2073.
    2. Javier Cravino & Andrei A. Levchenko, 2017. "Multinational Firms and International Business Cycle Transmission," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 921-962.
    3. repec:oup:restud:v:84:y:2017:i:3:p:1306-1345. is not listed on IDEAS
    4. Zlate, Andrei, 2016. "Offshore production and business cycle dynamics with heterogeneous firms," Journal of International Economics, Elsevier, vol. 100(C), pages 34-49.
    5. Natalia Ramondo & Lindsay Oldenski & Stefania Garetto, 2016. "The Dynamics of Multinational Activity: Evidence from U.S. Firms," 2016 Meeting Papers 1431, Society for Economic Dynamics.
    6. Chakraborty, Indraneel & Hai, Rong & Holter, Hans A. & Stepanchuk, Serhiy, 2017. "The real effects of financial (dis)integration: A multi-country equilibrium analysis of Europe," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 28-45.
    7. Zhongjun Qu & Denis Tkachenko, 2017. "Global Identification in DSGE Models Allowing for Indeterminacy," Review of Economic Studies, Oxford University Press, vol. 84(3), pages 1306-1345.
    8. Mine Senses & Andrei Zlate & Christopher Kurz, 2017. "All Shook Up: International Trade and Firm-level Volatility," 2017 Meeting Papers 851, Society for Economic Dynamics.
    9. Anna Gumpert & Andreas Moxnes & Natalia Ramondo & Felix Tintelnot, 2017. "The Life-Cycle Dynamics of Exporters and Multinational Firms," CESifo Working Paper Series 6758, CESifo Group Munich.
    10. repec:eee:finana:v:55:y:2018:i:c:p:35-49 is not listed on IDEAS

    More about this item

    Keywords

    Multinational firms; diversification; risk premium; stock returns;

    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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