Should we invest more in multinational companies when domestic markets decline?

Investments in domestic multinational companies (MNCs) may provide an indirect route for investors to diversify internationally. Therefore, a priori, the authors would expect investors to increase their exposure to MNCs and decrease their exposure to domestic firms when the domestic market is declining. This paper uses a twenty-year data set of all publicly listed US firms from 1995 to 2014 to create a unique measure of both the extent and the scope of firm-level multinationality. It estimates their model using a modified version of the Fama–French three- and five-factor models. They find that, contrary to expectation, investors favor domestic firms to MNCs in declining markets. Their results are likely driven by one of two factors: either investors do not recognize the indirect diversification benefits from investing in MNCs or investors are behaving irrationally. Finally, they investigate whether their results are influenced by share ownership but find that their results apply for both institutional and retail investors.