Massimo Massa, James O'Donovan, Hong Zhang
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. © 2021
INSEAD, 1 Ayer Rajah Avenue, Singapore, 138676, Singapore; City University of Hong Kong, Hong Kong; Tsinghua University, PBC School of Finance, China
