The Comovement of Returns and Investment Within the Multinational Firm

32 Pages Posted: 13 Sep 2004  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

Abstract

Can financial integration, particularly the cross-border investments of multinational firms, help explain the synchronization of business cycles? This paper presents evidence on the comovement of returns and investment within U.S. multinational firms to address this question. These firms constitute significant fractions of economic output and investment in most large economies, suggesting that they could create significant economic linkages. Aggregate measures of rates of return and investment rates of U.S. multinational firms located in different countries are highly correlated across countries. Firm-level regressions demonstrate that rates of return and investment rates of affiliates are highly correlated with the rates of return and investment of the affiliate's parent and other affiliates within the same parent system, controlling for country and industry factors. The evidence on these interrelationships and the importance of multinationals to local economies suggests that global firms may be an important channel for transmitting economic shocks. This evidence also sheds light on asset pricing puzzles related to the diversification benefits provided by multinational firms.

Keywords: Foreign direct investment, multinational firms, comovement, business cycles

JEL Classification: F21, F23, F36, F42, G15

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz, The Comovement of Returns and Investment Within the Multinational Firm (September 2004). Available at SSRN: https://ssrn.com/abstract=588403 or http://dx.doi.org/10.2139/ssrn.588403

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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617-495-6693 (Phone)
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C. Fritz Foley

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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