This article starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than nonmultinational firms. Within nonmultinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost they paid to enter. Multinational firms are the most exposed because of the higher costs they have to pay to invest. The calibrated model is able to match both aggregate U.S. export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe generalize the classic Grossman and Laroque (1990) (GL) model of optimal portfolio choice with housing and transaction costs by introducing predictability in house prices. As in the GL model, agents only move to more expensive (cheaper) houses when their wealth-to-housing ratios reach an optimal lower (upper) boundary. However, in our model, these boundaries are time-varying and depend on the dynamics of the expected growth rate of house prices. We find that households moving to a more expensive house in periods of high expected growth in house prices have significantly lower ex-ante wealth-to-housing ratios than those moving in periods of low expected growth. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices and that it is higher right before moving during periods of low growth. The main implications of the model are robust to tests using household level data from the PSID and SIPP surveys.JEL Classification: G11, D11, D91, C61. Keywords: Durable goods, transaction costs, housing returns predictability, optimal housing consumption and investment. Non-technical summaryHousing plays an important role in the portfolio choices of households because it accounts for an important fraction of their wealth. However, several specific characteristics of housing make portfolio allocation decisions nontrivial. First, housing is a durable consumption good as well as an investment asset. Second, moving to a new house involves high transaction costs; therefore, homeowners would find it optimal to rebalance their housing position less frequently than other financial assets. Third, housing returns present a certain degree of predictability. The main contribution of this paper is to solve a portfolio choice problem that incorporates these three particular characteristics of housing and to test its empirical implications. The paper provides a first step towards understanding the existence of housing returns predictability and its qualitative and quantitative impact on housing consumption and portfolio decisions subject to transaction costs.First, we motivate and explore predictability in housing returns. A natural candidate for capturing regular switches between these regimes is the empirical model developed in Hamilton (1990).We use a long time series of data to estimate the parameters of a 2-regime process that assumes that the expected growth o...
This paper starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than nonmultinational firms. Within non-multinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to enter. Multinational firms are the most exposed due to the higher costs they have to pay to invest. The calibrated model is able to match both aggregate US export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.
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