International Asset Pricing with Strategic Business Groups

60 Pages Posted: 15 Jul 2021

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

James O'Donovan

City University of Hong Kong (CityUHK)

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2021

Abstract

Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel dataset of worldwide ownership for 2002-2012, we find that central firms are better protected in bad times and that they earn relatively lower expected returns. Moreover, a centrality factor augments traditional models in explaining the cross-section of international stock returns.

Keywords: International Asset Pricing, Business groups, Centrality, Co-movement.

JEL Classification: G20

Suggested Citation

Massa, Massimo and O'Donovan, James and Zhang, Hong, International Asset Pricing with Strategic Business Groups (June 14, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3885521

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

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James O'Donovan

City University of Hong Kong (CityUHK) ( email )

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Hong Kong

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://www.hongzhang.info

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