The Channels of International Comovement 
A multinational company can be exposed to a foreign country by owning subsidiaries abroad or by being owned by foreign investors, through direct lending by a foreign bank or through the purchase of its bonds by foreign investors, by serving customers in that country, or by purchasing intermediate inputs from that country. In principle, a company is exposed to a foreign country through several of these channels simultaneously, but data limitations generally prevent researchers from studying them together. This paper gathers information on the most relevant ways in which companies are connected to foreign economies and studies how these connections affect comovement of those companies’ returns and cash flows.
Key Findings
- Companies match their country exposures through several channels simultaneously. They do this so much so that knowing a company is linked to a country through any channel is the best way to predict simultaneous exposure through all other channels—better than knowing country, firm, or distance characteristics.
- The returns and cash flow of a multinational company tend to comove with the returns and cash flows of other multinationals that are exposed to the same country through the same channels.
- In order of importance, companies’ returns and cash flows comove when their lenders, investors, subsidiaries, suppliers, and customers are located in the same country.
- The returns and cash flows of companies that are exposed to the same country but through different channels tend to comove less than those of companies with the same exposure channels.
Implications
To understand the importance of international linkages between different economies, we must consider the widespread simultaneous interaction between financing and trade linkages at the firm level. The lower comovement of returns and cash flows of companies exposed to a foreign market through multiple channels suggests either an operational hedging motive or beneficial spillovers between existing linkages in any particular country. This paper’s results can help to explain previous studies’ findings that, on average, increased market integration in a foreign country does not lead to increased return and cash flow comovement among companies exposed to that country. The results support the explanation that, as an operational hedging strategy, multinationals systematically establish a variety of business linkages to any foreign market to lower their dependence on country-specific conditions.
Abstract
How does exposure to international markets affect returns and cash flow comovements? Foreign bond owners, lenders, affiliates, investors, customers, and suppliers all transmit country shocks to companies. Most multinationals have many of these exposures simultaneously within the same foreign market. Returns and cash flows of two companies comove when exposed to the same country through the same channel. Within-country exposure through different channels is generally associated with lower comovement, in line with an operational hedging strategy. This evidence can help reconcile how, on average, increased market integration does not lead to increased comovement.