The State Expropriation Risk and the Pricing of Foreign Earnings

We examine the pricing of U.S. multinational firms’ foreign earnings in regard to their risk of expropriation and unfair treatment by the governments of the countries in which their international subsidiaries are located. Using 8,891 firm-years observations during the 2001-2013 period, we find that the value relevance of foreign earnings increases with the improvement of the protection from state expropriation risk in the subsidiary host-countries. Our results are not driven by the earnings management practice, investor distraction, country informativeness, and political and trade relationship of a foreign country with the US. Furthermore, our results are robust to the confounding effects of country factors, measurement error in the variable of the risk of expropriation, influence of private contracting institutions, and endogeneity in the decision of location of subsidiaries.