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This paper proposes two main opposing channels through which firms’ degree of internationalisation affects stock returns. In particular, firms that operate internationally benefit from risk reduction via diversification channel and also encounter higher risk exposure due to various risk factors in international markets. Using a sample of 566 multinational publicly listed companies in the London Stock Exchange during 1999 and 2010, this paper empirically tests whether firms’ degree of internationalisation is a new asset pricing factor in addition to the standard risk factors such as beta, size, book-to-market, leverage, momentum, and product market competition. The results show that firms’ degree of internationalisation is positively and significantly related to the cross-section of stock returns in all Fama and MacBeth regressions, even after accounting for beta, size, book-to-market, leverage, and momentum. In addition, the effect of internationalisation on stock return becomes statistically insignificant after controlling for product market competition, indicating that the interaction term between competition and internationalisation plays a role in explaining stock returns. Overall, the empirical findings indicate that firms or industries with higher degree of internationalisation earn, on average, higher risk-adjusted returns. The results of this paper suggest that although multinational firms can benefit from cash flow diversification by going international, firms with higher degree of internationalisation are risky than firms with lower degree of internationalisation due to higher political, foreign exchange, and distress risks faced by multinational companies in international markets.

Firms’ Degree of Internationalisation and the Cross-Section of Stock Returns: Evidence from Multinational Listed Companies in the U.K.