On the origins of the multinational premium

Arbeitspapier

How do foreign direct investment (FDI) dynamics relate to the risk premium of a firm? To answer this question, we compare the stock returns of US firms with different FDI and mergers and acquisitions (M&A) exposure to study the evolution of stock returns as firms expand into foreign markets. We document three empirical regularities. First, there are cross-sectional risk premia associated with both multinational activity and mergers and acquisitions. Second, firm-level stock returns decline when a firm undertakes M&A activity and with merger deepening. Third, future multinational acquirers already have higher stock returns compared with domestic non-acquirers prior to entering foreign markets, indicating that cross-sectional returns differentials are driven by selection based on common unobserved firm characteristics. We find that CEOs play a role in explaining the relationship between firms' risk premia and foreign expansion. To rationalize these facts, we develop a dynamic model in which management attitudes shape the relationship between firm characteristics, selection into FDI, and risk premia.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Papers ; No. 21-20

Classification and Topics

• Classification: Wirtschaft ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Multinational Firms; International Business ; Financial Aspects of Economic Integration
• Subject: multinational firms ; mergers and acquisitions ; management ; stock returns

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fillat, José ; Garetto, Stefania
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Boston
• (where): Boston, MA
• (when): 2021

Further information

• DOI: doi:10.29412/res.wp.2021.20
• Handle: http://hdl.handle.net/10419/250737
• Last update: 10.03.2025, 11:42 AM CET