Essays on international corporate finance

Date of Completion

January 2001

Keywords

Economics, Commerce-Business|Economics, Finance

Degree

Ph.D.

Abstract

Essay 1 compares the cost of equity estimates of US stocks and ADRs between three asset-pricing models. Three asset pricing models are the traditional local CAPM (US-CAPM), the single factor global CAPM (SF-GCAPM), and the two-factor global CAPM (CI-GCAPM) with both market and currency index factors. For 2989 US stocks, the average difference in the cost of equity estimates is about 48 basis points between the US-CAPM and SF-GCAPM, and is about 61 basis points between the two global models. For developed-market ADRs, the corresponding average differences are 76 and 47 basis points, respectively, and those for emerging-market ADRs, are 57 and 70 basis points. The prediction errors for ADRs are very large under all models, and minimally different across models. Whether a domestic market index or a global market index should be used in the CAPM to estimate cost of equity is debated in several studies. Essay 2 compares the cost of equity estimates of domestic and global CAPM with ex ante cost of equity for the stocks represented in S&P 500. The results support the use of local market index, though the differences are minimally superior to the use of global market index. Essay 3 provides an empirical test of a theory of foreign exchange (FX) exposure hedging based on complexity. The sample is all US non-financial firms with sales exceeding $1 billion, represented in CompuStat, Disclosure, and CRSP files. The essay identifies several proxies for complexity and tests if FX-derivatives use and volume decisions relate to these proxies. Results indicate, qualitative decision (use) of FX derivatives is positively related to the complexity index, the number of SIC codes representing 5% or more of sales, the ratio of foreign income to sales, and negatively related to book to market ratio. While the quantitative decision, (volume) is highly related to a complexity index, foreign income to sales, and R&D expenses. Overall, the findings support that both the qualitative (use) and quantitative (volume) decisions of FX derivatives significantly relate to the degree of complexity of a firm. ^

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