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Fool’s Gold: Currency Devaluations and Stock Prices of Multinational Companies Operating in Venezuela

Author

Listed:
  • Dany Bahar

    (Center for International Development at Harvard University)

  • Miguel Angel Santos

    () (Center for International Development at Harvard University)

  • Carlos Alberto Molina

Abstract

Devaluations may have an impact on multinational stock prices depending on the size of the country and whether they are anticipated or not. In an efficient market, predictable devaluations on small countries should not impact stock prices of large multinational companies. We analyze cumulative abnormal returns (CAR) to five devaluations in Venezuela within the context of stiff exchange controls. Our event study covers five years and uses daily stock prices for 110 multinationals with Venezuelan subsidiaries. We find evidence of significant negative cumulative abnormal returns on stock prices on three devaluations, reaching up to 2.10% over the event window. We interpret these results as evidence of market myopia, as they are driven by financial statements being converted into dollars at highly overvalued official rates, despite subsidiaries not having access to dollars at these prices.

Suggested Citation

  • Dany Bahar & Miguel Angel Santos & Carlos Alberto Molina, 2017. "Fool’s Gold: Currency Devaluations and Stock Prices of Multinational Companies Operating in Venezuela," CID Working Papers 83a, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:83a
    as

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    File URL: https://growthlab.cid.harvard.edu/files/growthlab/files/devaluations_ven_cidrfwp83.pdf
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    References listed on IDEAS

    as
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    3. Glen, Jack, 2002. "Devaluations and emerging stock market returns," Emerging Markets Review, Elsevier, vol. 3(4), pages 409-428, December.
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    5. Patro, Dilip K. & Wald, John K. & Wu, Yangru, 2014. "Currency devaluation and stock market response: An empirical analysis," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 79-94.
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    7. Cox, Don R & Peterson, David R, 1994. " Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, vol. 49(1), pages 255-267, March.
    8. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-934, September.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    devaluation; market efficiency; market myopia; multinationals; abnormal returns; exchange controls;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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