The dark side of globalization: Evidence from the impact of COVID-19 on multinational companies
- 6 September 2022
- journal article
- research article
- Published by Springer Science and Business Media LLC in Journal of International Business Studies
- Vol. 53 (8), 1603-1640
- https://doi.org/10.1057/s41267-022-00540-8
Abstract
The COVID-19 pandemic has led to economic and health crises (“twin crises”) worldwide. Using a sample of firms from 73 countries over the period January to December 2020, we examine stock price reactions of multinational corporations (MNCs) and purely domestic companies (DCs) to the crisis. We find that, on average, MNCs suffer a significantly larger decline in firm value relative to DCs during the stock market crisis caused by the pandemic with notable heterogeneity in this underperformance across both industry and region. The evidence of MNC underperformance is robust to using abnormal returns, an alternative crisis window, a matched sample that accounts for differences in characteristics between MNCs and DCs, alternative model specifications, and alternative proxies for multinationality. Further analysis on the effect of government responses on the valuation gap suggests that stringent government responses exacerbate MNCs’ underperformance. Finally, we show that a stronger financial system mitigates negative crisis returns, especially under stringent government responses, while real factors, such as the firm’s supply chain, investments in human capital, research and development, exacerbate negative crisis returns. Our findings have important implications for managers of MNCs and government policymakers alike and contribute to studies on the international diversification–performance relation by demonstrating a dark side of globalization during a tail-risk event.Keywords
This publication has 64 references indexed in Scilit:
- Valuation effects of global diversificationJournal of International Business Studies, 2009
- International Asset Allocation With Regime ShiftsThe Review of Financial Studies, 2002
- Corporate International Activity and Debt FinancingJournal of International Business Studies, 2002
- Increased Correlation in Bear MarketsCFA Magazine, 2002
- The Foreign Exchange Exposure of Japanese Multinational CorporationsThe Journal of Finance, 1998
- Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?The Quarterly Journal of Economics, 1997
- Diversification's effect on firm valueJournal of Financial Economics, 1995
- Tobin's q, Corporate Diversification, and Firm PerformanceJournal of Political Economy, 1994
- Why Investors Value MultinationalityThe Journal of Business, 1991
- International Capital Market Equilibrium and the Multinational Firm Financing and Investment PoliciesJournal of Financial and Quantitative Analysis, 1979