The Rule of Law and the Pricing of Foreign Earnings

54 Pages Posted: 17 Sep 2019 Last revised: 30 Nov 2019

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Ibrahim Siraj

Long Island University-Post

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Date Written: November 11, 2019

Abstract

We examine the pricing of foreign earnings of U.S. multinational firms in the context of the risk of expropriation and unfair treatment by the government, measured by the rule of law index from World Bank Governance Indicators, of countries in which the international subsidiaries are located. Using 12,288 firm-years observations for the period of 1996 to 2013, we find that association of foreign earnings with returns is increasing with the average rule of law of countries in which the multinationals have subsidiaries. We find negative returns-foreign earnings association when a firm expands its operations to other countries, but such association turns out positive when the expansion occurs to countries with stronger investor protection. The results are not driven by the practices by earnings management nor by the strength of legal protection from expropriation by corporate insiders. Our results are robust to alternative empirical specifications and to the concern of endogenous relationship between market valuation and multinational choice of locating foreign subsidiaries to the high rule of law region.

Suggested Citation

Hasan, Iftekhar and Siraj, Ibrahim and Tarazi, Amine and Wu, Qiang, The Rule of Law 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
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Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Ibrahim Siraj (Contact Author)

Long Island University-Post ( email )

United States

Amine Tarazi

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

5 rue Felix Eboue
Limoges, 87000
France

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

110 8th St
Troy, NY 12180
United States
518-276-3338 (Phone)
518-276-8661 (Fax)

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