On the Origins of the Multinational Premium On the Origins of the Multinational Premium

By José L. Fillat and Stefania Garetto

Direct investment in foreign markets may expose a firm to additional risks that are different from those it faces in the domestic market, or it may serve as a vehicle for diversification, acting as a hedge against a firm’s country-specific risks. This paper examines the risk premia of firms that expand their operations into foreign markets, considering both mergers and acquisitions (M&A) and greenfield foreign direct investments (FDI). After establishing the existence of a sizeable risk premium associated with FDI and M&A activity, the authors investigate its origins, looking specifically at whether firms that become multinational acquirers grow riskier as they expand abroad, or if other factors explain firms’ risk premia and foreign expansion.

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