Should We Invest More in Multinational Companies (MNCs) when Domestic Markets Decline?

Abstract

Investments in domestic multinational companies (MNCs) may provide an indirect route for investors to diversify internationally. Therefore, a priori, one would expect investors to increase their exposure to MNCs when the domestic market is declining, and decrease their exposure to domestic firms. We use a 20 year dataset of all publically listed US firms from 1995 to 2014 to create a unique measure of both the extent and scope of firm level multinationality. We estimate a modified version of the Fama-French three and five factor models. We find that, contrary to expectations, investors favour domestic firms to MNCs in declining markets. We propose that our results are driven by one of two factors – either investors do not recognize the indirect diversification benefits from investing in MNCs or investors are behaving irrationally. Finally, we investigate if our results are influenced by share ownership but find that they apply to both institutional and retail investors.