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Diversification, Cost Structure, and the Risk Premium of Multinational Corporations

Author

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  • Jose L. Fillat

    (Federal Reserve Bank of Boston)

  • STEFANIA GARETTO

    (Department of Economics, Boston University)

  • Lindsay Oldenski

    (Georgetown University)

Abstract

We investigate theoretically and empirically the relationship between the geographic structure of a multinational corporation and its risk premium. Our structural model suggests two channels. On the one hand, multinational activity offers diversification benefits: risk premia should be higher for firms operating in countries where shocks covary more with the domestic ones. Second, hysteresis and potential losses induced by fixed and sunk costs of production imply that risk premia should be higher for firms operating in countries where it is costlier to enter. Our empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries’ contributions.

Suggested Citation

  • Jose L. Fillat & STEFANIA GARETTO & Lindsay Oldenski, 2014. "Diversification, Cost Structure, and the Risk Premium of Multinational Corporations," Boston University - Department of Economics - Working Papers Series WP2014-007, Boston University - Department of Economics.
    • Handle: RePEc:bos:wpaper:wp2014-007
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    More about this item

    Keywords

    Multinational firms; diversification; risk premium; stock returns;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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