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

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.