The Euro is Good after All: Evidence from Corporate Valuations
47 Pages Posted: 22 Jul 2003
Date Written: May 2003
In this Paper we study the changes in corporate valuation induced by the formation of Economic and Monetary Union (EMU) in Europe. We use corporate-level data from ten countries that adopted the euro, the three EU countries that did not join EMU, as well as Norway and Switzerland. We show that the introduction of the euro has increased Tobin's Q-ratios in EMU countries by 7.4%. The effects prevail even if we account for the decrease in long-term interest rates. The increases in Tobin's Q are larger for firms that are ex-ante expected to benefit more, i.e. firms from countries that had weak currencies and firms that were exposed to intra-European currency risks. Finally, the increases are also more significant for firms that are financially unconstrained. The evidence provided here supports the view that the introduction of the euro has lowered firms' cost of capital in EMU-countries.
Keywords: Economic and monetary union (EMU), the euro, valuation, cost of capital, currency risk, currency union
JEL Classification: F33, F36, G32
Suggested Citation: Suggested Citation