The Euro and Corporate Valuations

Abstract

In this paper we study the changes in corporate valuations induced by the adoption of the euro as the common currency in Europe. We use corporate-level data from eleven countries that adopted the euro, the three EU countries that did not start using the euro, as well as Norway and Switzerland. We show that the introduction of the euro has increased Tobin's Q-ratios by 17.1% in the euro-area countries that previously had weak currencies. Part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity. The increases in Tobin's Q are larger for firms that would be harmed by currency devaluations.

Keywords: Economic and Monetary Union (EMU), the euro, valuation, cost of capital, currency risk, currency union

JEL Classification: F33, F36, G32