Risk, Returns, and Multinational Production

49 Pages Posted: 17 Mar 2010 Last revised: 1 Feb 2023

See all articles by Jose L. Fillat

Jose L. Fillat

Federal Reserve Banks - Federal Reserve Bank of Boston

Stefania Garetto

Boston University

Date Written: March 11, 2010

Abstract

This article starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than nonmultinational firms. Within nonmultinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost they paid to enter. Multinational firms are the most exposed because of the higher costs they have to pay to invest. The calibrated model is able to match both aggregate U.S. export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.

Keywords: Multinational firms, option value, cross-sectional returns

JEL Classification: F12, F23, G12

Suggested Citation

Fillat, Jose L. and Garetto, Stefania, Risk, Returns, and Multinational Production (March 11, 2010). Quarterly Journal of Economics, Vol. 130, No. 4, 2015, AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1571331 or http://dx.doi.org/10.2139/ssrn.1571331

Jose L. Fillat (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3342 (Phone)
617-5735445 (Fax)

HOME PAGE: http://www.bos.frb.org/economic/econbios/fillat.htm

Stefania Garetto

Boston University ( email )

270 Bay State Road
Boston, MA 02215
United States

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