DP15746 International Asset Pricing with Strategic Business Groups
|Author(s):||Massimo Massa, James O'Donovan, Hong Zhang|
|Publication Date:||February 2021|
|Date Revised:||February 2021|
|Keyword(s):||Business Groups, Centrality, Co-movement, International Asset Pricing|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15746|
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." The ensuing hedging demand induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel dataset 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.