DP15746 International Asset Pricing with Strategic Business Groups

Author(s):	Massimo Massa, James O'Donovan, Hong Zhang
Publication Date:	February 2021
Date Revised:	March 2021
Keyword(s):	Business Groups, Centrality, Co-movement, International Asset Pricing
JEL(s):	G20
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.