Risk, Returns, and Multinational Production *
Open accessAbstract
This article starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than nonmultinational firms. Within nonmultinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost they paid to enter. Multinational firms are the most exposed because of the higher costs they have to pay to invest. The calibrated model is able to match both aggregate U.S. export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.
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Fillat and Garetto (2015) argue that the stickiness associated with large sunk costs inherent in multinational activity and GVCs explains why multinational corporations exhibit significantly higher stock market returns and earning yields than non-multinational firms.
“Fillat and Garetto (2015) argue that the stickiness associated with the large sunk costs inherent in multinational activity and GVCs explains the fact that multinational corporations exhibit significantly higher stock market returns and earning yields than non -multinational firms.”
From De-Globalisation? Global Value Chains in the Post-COVID-19 Age (2020) · cites this paper as Fillat and Garetto (2015)
The Introduction (p. 3) explains that sunk entry costs make firms reluctant to leave foreign markets after adverse shocks, increasing multinationals’ risk exposure and equilibrium returns. The Conclusions (p. 40) report higher stock returns and earnings yields for multinationals. The cited passages do not extend this explanation to global value chains (GVCs), so that part of the claim is unsupported. (LLM, conf=0.86)
Experimental — accuracy not yet measuredEmpirical work has documented the sticky nature of global value chains and associated this stickiness with the sunk nature of many investments made by firms organizing their value chains globally, especially when imperfect enforceability of international contracting leads firms to invest in non-tangible capital such as reputational capital.
“This literature has further associated this stickiness with the sunk nature of many of the investments made by firms organizing their value chains globally, especially in circumstances in which the imperfect enforceability of international contracting leads firms to invest in non -tangible forms of capital, such as reputational capital.”
From De-Globalisation? Global Value Chains in the Post-COVID-19 Age (2020) · cites this paper as Fillat and Garetto (2015)
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Cited by
Sorted by citations
De-Globalisation? Global Value Chains in the Post-COVID-19 Age
Antràs, P. (2020) · doi:10.3386/w28115 · Cited by 376 · see citing works
- Authors
- Fillat, J. L., & Garetto, S.
- Affiliations
- Federal Reserve Bank of Boston (US)
- Boston University (US)
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 2015-09-04
- Volume
- 130
- Issue
- 4
- Pages
- 2027-2073
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W2150876546
- Cited by
- 148
- References
- 4
- Citations by year
- 2026: 8 · 2025: 16 · 2024: 9 · 2023: 8 · 2022: 12 · 2021: 18 · 2020: 11 · 2019: 10 · 2018: 7 · 2017: 11 · 2016: 9 · 2015: 7 · 2014: 5 · 2013: 5 · 2012: 3
- FWCI
- 31.74
- Type
- journal article
- Language
- en
- Open access
- green
- doi.org
- Locations
- The Quarterly Journal of Economics (publishedVersion)
- SSRN Electronic Journal (acceptedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Strategy and Management › International Business and FDI
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Global trade and economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Keywords
- multinational corporations, foreign direct investment, exports, stock returns, earnings yield, real options, sunk costs, firm heterogeneity, productivity
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