The Multinational Return Premium: An Investor Perspective

Abstract

Using the monthly returns of 37,854 firms in 23 developed markets over the period 1990-2015, we document that multinational companies earn higher returns than domestic companies by 24 basis points per month. This finding is further confirmed by using a sample of 18,996 U.S. firms over the period 1973-2015. We find that the multinational return premium cannot be fully explained by well-known asset pricing anomalies. The magnitude of the multinational return premium depends on the location of foreign operations: it is more concentrated in multinationals operating in countries with lower GDP growth, lower private credit, lower R&D exports, or higher labor costs and in countries that are more distant from MNCs' home countries. Moreover, the return difference is more pronounced in countries with less stringent disclosure requirements. Our findings suggest that firms' international activities deliver information relevant to investors and can predict stock returns.

Keywords: multinational companies, international diversification, returns

JEL Classification: G11, G12, G15