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Risk premia in multi-national enterprises

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  • Stefan Lutz

Abstract

The CAPM implies that investors require equity risk premia when choosing risky investments and therefore demand higher returns to equity invested if higher risk is present. This should apply to investments in independent enterprises and multi-national enterprises alike. This hypothesis is investigated by analyzing a panel of 407,000 European firms for the years 1985 to 2010. When income is set in relation to invested capital, risk measured by earnings volatility emerges as the most important stable determinant of income. Results indicate that both MNEs and independent firms regularly account for risk as a major determinant of income when pricing international goods and services. Hence international taxation rules for multi-national enterprises should account for risk premia in transfer prices and resulting profits.

Suggested Citation

  • Stefan Lutz, 2012. "Risk premia in multi-national enterprises," ICER Working Papers 08-2012, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:08-2012
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    References listed on IDEAS

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    1. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    2. Stefan Lutz & Daniel Kleinfeldt, 2013. "Risk as Determinant of Income and Cross-border Pricing of Multinational Enterprises," Studies in Microeconomics, , vol. 1(2), pages 185-212, December.
    3. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
    4. Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    6. André F. Perold, 2004. "The Capital Asset Pricing Model," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 3-24, Summer.
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    Cited by:

    1. Hammoudeh, Shawkat & McAleer, Michael, 2013. "Risk management and financial derivatives: An overview," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 109-115.
    2. Stefan Lutz, 2011. "Simultaneous determination of market value and risk premium in the valuation of firms," Economics Discussion Paper Series 1120, Economics, The University of Manchester.
    3. Stefan Lutz & Daniel Kleinfeldt, 2013. "Risk as Determinant of Income and Cross-border Pricing of Multinational Enterprises," Studies in Microeconomics, , vol. 1(2), pages 185-212, December.
    4. Lutz, Stefan, 2018. "R&D, IP, and firm profits in the North American automotive supplier industry," Working Paper Series 12, Frankfurt University of Applied Sciences, Faculty of Business and Law.
    5. Huang, Hung-Hsi & Wang, Ching-Ping, 2013. "Portfolio selection and portfolio frontier with background risk," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 177-196.
    6. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," Economics Discussion Paper Series 1214, Economics, The University of Manchester.
    7. Stefan Lutz, 2013. "R&D, IP, and firm profits in the automotive supplier industry," Economics Discussion Paper Series 1313, Economics, The University of Manchester.
    8. Huang, Ying Sophie & Wang, Yizhong, 2013. "Asset price, risk transfer and economic activities: Firm-level evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 663-676.

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    More about this item

    Keywords

    MNE; firm valuation; DCF; CAPM; risk premium; transfer pricing;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • F2 - International Economics - - International Factor Movements and International Business
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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