Multinational firms tend to earn higher stock returns than purely domestic firms, raising questions about what drives their differential exposure to aggregate risk. This column presents evidence that firms run by CEOs with multinational expertise are more likely to expand abroad, and domestic firms that will go on to become multinationals carry higher risk premia before they even expand. The authors explain these patterns through a model that predicts that managerial ability amplifies the risk premia of domestic firms (through the option value of becoming multinational) while dampening the risk premia of multinationals (through operating leverage), and discuss the implications for tax policy.



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