Discussion of: the state expropriation risk and the pricing of foreign earnings

Hasan et al. (2021) examine the association between country-level expropriation risk and the pricing of foreign earnings in multinational corporations (MNCs). They contend and find that, when subsidiary country expropriation risk declines, the value relevance of foreign earnings increases. Hasan et al. (2021) view their evidence as consistent with the idea that investors discount foreign earnings when they perceive the risk of expropriation and unfair treatment by foreign governments to be high. The study of Hasan et al. (2021) aims to contribute to the longstanding stream of the literature that examines the pricing and value relevance of foreign earnings (e.g., Thomas, 1999; Callen et al., 2005; Hope et al., 2009), as well as to the nascent literature that investigates the within-MNC determinants of financial reporting transparency (e.g., Dyreng et al., 2012; Beuselinck et al., 2019). My discussion focuses on three key issues. First, related to the study’s theoretical underpinnings, a maintained assumption of Hasan et al. (2021) is that the pricing of foreign subsidiary earnings is only explained by investors discounting foreign subsidiary earnings to account for subsidiary country risk of expropriation in their investment decisions—that is, investors rely less (more) on foreign subsidiary earnings when subsidiary country risk of expropriation is high (low). I argue that Hasan et al. (2021)’s maintained assumption is rather strong, as it neglects the realistic possibility that the pricing of foreign subsidiary earnings is also a function of subsidiary earnings quality. Second, the evidence in Hasan et al. (2021) mainly relies on a cross-sectional identification strategy and thus their findings are to be interpreted with this caveat in mind. Third, while Hasan et al. (2021) are careful in designing a number of sensitivity tests to account for the influence of confounders, potential alternative explanations for their documented findings are hard to rule out. 2 The remainder of my discussion unfolds as follows. Section 2 provides some perspectives on the theoretical underpinnings of Hasan et al. (2021). Section 3 focuses on the empirical challenges. Section 4 discusses potential alternative explanations for the documented findings. Section 5 concludes.