The Euro and Corporate Valuations
Posted: 12 May 2008
In this paper we study the changes in corporate valuations induced by the adoption of the euro as the common currency in Europe. We use corporate-level data from 17 European countries of which 11 adopted the euro. We show that the introduction of the euro has increased Tobin's Q-ratios by 17.1% in the euro-area countries that previously had weak currencies. Part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity. The increases in Tobin's Q are larger for firms that would be harmed by currency devaluations.
Keywords: Economic and Monetary Union (EMU), the euro, valuation, cost of capital, currency risk, currency union
JEL Classification: F33, F36, G32
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