International Economics Seminars
Becoming a Multinational: An Analysis of Market Access and Risk through Mergers
Stefania Garetto (Boston University), joint with Jose L. Fillat (Federal Reserve Bank of Boston)
Wednesday 24 March 2021 17:00 - 18:30
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About this event
How do foreign direct investment dynamics affect the risk premium of a firm? To answer this question, we examine foreign affiliate opening and foreign acquisitions in a large sample of US firms over time. Our analysis focuses on a comparison of risk premia across US firms with different FDI and M&A exposure, and on the evolution of firm-level risk premia as firms expand into foreign markets. We document three empirical regularities. First, there are cross-sectional risk premia associated with both multinational activity and M&A. Second, long-run firm-level stock returns decline when a firm undertakes M&A activity, and with merger deepening. Third, future multinational enterprises (MNEs) have higher stock returns than non-MNE firms already prior to entry in foreign markets, indicating that cross-sectional returns differentials are driven by selection based on common unobserved firm characteristics resulting in both MNE status and higher stock returns. To explain these patterns, we nest a dynamic model of international investment into a standard CCAPM model.