The Euro and Corporate Valuations

Abstract

In this paper, we study the changes in corporate valuations induced by the adoption of the euro as the common currency in Europe. We use corporate-level data from seventeen European countries, of which eleven adopted the euro. We show that the introduction of the euro has increased Tobin's Q-ratios by 17.1% in the {euro-area} countries that previously had weak currencies. Part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity. The increases in Tobin's Q are larger for firms that would be harmed by currency devaluations. Disciplines Finance | Finance and Financial Management CommentsAt the time of publication, author Yrjo Koskinen was affiliated with Boston University School of Management and CEPR. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania. November 2007Electronic copy available at: http://ssrn.com/abstract=508002 AbstractIn this paper we study the changes in corporate valuations induced by the adoption of the

The Real Effects of the Euro: Evidence from Corporate Investments*

“…Our own work (Bris et al, 2003b) concludes that value increases among …rms in the euro-countries are consistent with a reduction in the cost of capital. In line with our view, Bartram and Karolyi (2003) show that the market risk has become lower for euro …rms with signi…cant exports to the euro area.…”

“…Bris, Koskinen and Nilsson (2003b) use the year 1998 as the benchmark year for adoption of the euro because that paper focuses on the valuation e¤ects of the new common currency and valuation measures based on market values are forward looking. Arguably, real variables like investments react more slowly to exogenous shocks than stock prices do.…”

“…5 The other euroarea countries (Austria, Belgium, Germany, France, Luxembourg, and Netherlands) did not experience signi…cant currency depreciations during the European Monetary System crisis in early 1990s -hence the label strong-euro countries. The classi…cation into weak-and strong-euro countries is important, because Bris et al (2003b) show that weak-euro …rms experience a signi…cant increase in their valuations after the introduction of the euro, as opposed to strong-euro …rms, which do not show any signi…cant increase in their valuations. Higher valuations should of course in turn lead to increased investments.…”

The European Union, the Euro, and Equity Market Integration

“…Of more interest to us is research focusing on the financial effects of the Euro. Bris, Koskinen and Nilsson (2008) show that corporate valuations increased in the Euro member countries that previously had weak currencies, possibly due to lower interest rates and costs of equity. Hardouvelis et al (2006Hardouvelis et al ( , 2007 claim that Euro adoption, rather than global trends or EU membership, served to integrate European equity markets in the 1990s.…”

Market standards in financial contracting: The Euro’s effect on debt securities

“…To establish this, we build on the expectation that the Euro's effect should differ across issuers; debt securities from Euro zone countries should be more affected than securities from outside the EMU. We employ a difference-in-difference approach-similar to the firm-level analyses of Bris et al (2006Bris et al ( , 2009Bris et al ( , 2014-to tease out the varying impact of the Euro on EMU and non-EMU debt securities. Our baseline analysis compares debt securities from issuers located in an EMU state (treatment group) with issuers in other European countries (control group).…”