The cost of equity capital and risk of U.S. multinational and U.S. domestic firms (1965-1978).

Abstract

This study tests the hypothesis that the cost of equity capital and hence the total risk of U.S. Multinational firms would decrease in relation to that of U.S. domestic firms because of the maturing (sophistication) of both the host countries and the multinational al corporations as well as the improvement of communications. It has been found that between 1965 and 1978, the host countries, recipients of foreign direct investment, have adopted a more mature and sophisticated attitude vis-a-vis the multinational firms. They have specified the type of foreign direct investment they sought more clearly and made appropriate rules more specific and clear. Likewise, the multinational firms have become more mature, experienced and sophisticated in their relationships with host countries. Moreover, communications have shown major improvements during the same period. The results of the tests are, in general, supportive of the above hypothesis. The cost of equity capital and the earnings-price for the overall averages of U.S. multinational firms have decreased in relation to that of U.S. domestic firms during 1965-1978. This means that the total risk of the multinational firms decreased in relation to that of the domestic firms. Systematic risk, as measured by beta values, has been roughly the same for both during 1971-1973. After that, the beta average of the domestic firms decreased in relation to that of the multinationals because of the synchronism of economic cycles in major Western industrialized countries.

Date of Award	1982
Original language	English
Awarding Institution	University of Bath