Risk premia in multi-national enterprises
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.
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- 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.
- Stefan Lutz & Daniel Kleinfeldt, 2010. "Risk as determinant of income and cross-border pricing of multi-national enterprises," ICER Working Papers 19-2010, ICER - International Centre for Economic Research.
- Stefan Lutz & Daniel Kleinfeldt, 2010. "Risk as determinant of income and crossborder pricing of multinational enterprises," The School of Economics Discussion Paper Series 1018, Economics, The University of Manchester.
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- 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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