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Diversification, Cost Structure, and the Stock Returns of Multinational Corporations

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  • Stefania Garetto

    (Boston University)

  • Lindsay Oldenski

    (Georgetown University)

  • Jose Fillat

    (Federal Reserve Bank of Boston)

Abstract

This paper investigates theoretically and empirically the relationship between the geographic structure of a multinational corporation and its stock market returns. We use a structural model to identify two main channels through which the fact of being a multinational firm affects returns. On the one hand, multinational activity offers diversification potential. On the other hand, there is cash flow risk arising from hysteresis and potential losses induced by sunk entry costs and fixed costs. To identify these channels empirically, we merge Compustat/CRSP data on stock returns with the Bureau of Economic Analysis data on the operations of multinational corporations. Preliminary empirical results confirm the predictions of the theory.

Suggested Citation

  • Stefania Garetto & Lindsay Oldenski & Jose Fillat, 2013. "Diversification, Cost Structure, and the Stock Returns of Multinational Corporations," 2013 Meeting Papers 1179, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1179
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    References listed on IDEAS

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    1. Malcolm Baker & C. Fritz Foley & Jeffrey Wurgler, 2009. "Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 337-369, January.
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    3. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-544, September.
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    5. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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    7. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-564, September.
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    Cited by:

    1. Federico J. Díez & Alan C. Spearot, 2014. "Core competencies, matching and the structure of foreign direct investment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(3), pages 813-855, August.

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