On the Origins of the Multinational Premium
Abstract: 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.
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Provider: Federal Reserve Bank of Boston
Part of Series: Working Papers
Publication Date: 2021-10-01