Risk, Returns, and Multinational Production
49 Pages Posted: 17 Mar 2010 Last revised: 1 Feb 2023
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Multi-Product Firms and Product Switching
By Andrew B. Bernard, Stephen J. Redding, ...
-
Multi-Product Firms and Product Switching
By Andrew B. Bernard, Stephen J. Redding, ...
-
Multi-Product Firms and Product Switching
By Stephen J. Redding, Andrew B. Bernard, ...
-
Multi-Product Firms and Product Switching
By Andrew B. Bernard, Stephen J. Redding, ...
-
Multi-Product Firms and Trade Liberalization
By Andrew B. Bernard, Stephen J. Redding, ...
-
Multi-Product Firms and Trade Liberalization
By Andrew B. Bernard, Stephen J. Redding, ...
-
Multi-Product Firms and Trade Liberalization
By Andrew B. Bernard, Stephen J. Redding, ...
-
Comparative Advantage and Heterogeneous Firms
By Andrew B. Bernard, Stephen J. Redding, ...
-
Comparative Advantage and Heterogeneous Firms
By Andrew B. Bernard, Stephen J. Redding, ...
-
Comparative Advantage and Heterogenous Firms
By Andrew B. Bernard, Stephen J. Redding, ...