The State Expropriation Risk and the Pricing of Foreign Earnings

60 Pages Posted: 17 Sep 2019 Last revised: 24 Mar 2021

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Ibrahim Siraj

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science; Economic Research Forum (ERF)

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Date Written: November 11, 2019

Abstract

We examine the pricing of U.S. multinational firms’ foreign earnings in regard to their risk of expropriation and unfair treatment by the governments of the countries in which their international subsidiaries are located. Using 8,891 firm-years observations during the 2001-2013 period, we find that the value relevance of foreign earnings increases with the improvement of the protection from state expropriation risk in the subsidiary host-countries. Our results are not driven by the earnings management practice, investor distraction, country informativeness, and political and trade relationship of a foreign country with the US. Furthermore, our results are robust to the confounding effects of country factors, measurement error in the variable of the risk of expropriation, the influence of private contracting institutions, and endogeneity in the decision of the location of subsidiaries.

Keywords: Value relevance; Expropriation Risk; Foreign Earnings; Multinationals

JEL Classification: G14, H13, M14, L22

Suggested Citation

Hasan, Iftekhar and Siraj, Ibrahim and Tarazi, Amine and Wu, Qiang, The State Expropriation Risk and the Pricing of Foreign Earnings (November 11, 2019). Available at SSRN: https://ssrn.com/abstract=3449764 or http://dx.doi.org/10.2139/ssrn.3449764

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

No contact information is available for Ibrahim Siraj

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