Risk and the valuation of the multinational enterprise

Inquires into the effects of multinational involvement have gone in a variety of directions. This research pursues the empirical relationship between a multinational firm's expected returns and market power. Data were collected on a sample of multinational firms and a "control" sample of domestic firms. Various pricing model tests are conducted for both sets of firms. The market power effect is studied over the time period 1970-1979 and two subperiods, 1970-1974 and 1975-1979. The former subperiod was characterized by foreign investment controls the most notable being the Interest Equalization Tax. The latter subperiod was virtually control free.

The results show that for the MNE sample, market power significantly affected expected returns. This result is consistent with two hypotheses raised as a rationale for the multinational enterprise. This market power effect, however is not present for the domestic firm sample. This finding suggests that there may be a link between an firm's expected returns and market power acquired via multinational involvement.