International asset pricing with strategic business groups

• Main Authors: MASSA, Massimo, ZHANG, Hong
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: International Asset Pricing; Business Groups; Centrality; Co-movement; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7055; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8054/viewcontent/DP15746.pdf
• Institution: Singapore Management University

Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel data set of worldwide ownership for 2002–2012, we find that central firms are better protected in bad times and that they earn relatively lower expected returns. Moreover, a centrality factor augments traditional models in explaining the cross section of international stock returns.