Essays on Information Technology, Multinational Firms and Asset Prices
In the first chapter of this dissertation I study the implications of InformationTechnology for Asset Prices. Using a comprehensive index of industry-level IT intensity, I uncover several empirical regularities in the cross section of equity returns over the past three decades: 1. Controlling for other commonly used factors, portfolios with exposure to industries with high IT intensity have on average 7% higher annual stock returns, suggesting industry-level IT intensity affects industry risk in a systematic way, 2. These risk premia are driven by firms in industries with a large presence of foreign multinationals, 3.These excess returns are not driven by High Tech sectors or the dot.com bubble. I formalize these empirical regularities through a two-country general equilibrium model with heterogeneous industries, allowing for differential IT adoption across industries and time variation in entry of multinational firms. Multinational firms operating outside of their headquarters are larger and more productive and adopt IT to operate more efficiently. The entry of multinational firms increases competition for domestic producers and displaces sales of unproductive incumbents. This framework emphasizes the channel of displacement risk through large productive multinational firms consistent with the literature on the effect of Information Technology on the expansion of large productive firms. Investors in industries with IT intensity, if incompletely diversified across countries and sectors, require larger returns to hold portfolios of smaller domestic firms in IT intensive industries and industries with a large share of sales dominated by multinational firms. Consistent with the model, the risk premium is higher for smaller firms and the effect of IT is amplified in industries with a larger share of foreign firms or more product substitutability. In the second chapter of this dissertation, I examine the relationship between information and communication technology, multinational activity and displacement risk for firms in United States. I use detailed data from Compustat on all public firms to create consistent measures of foreign sales of firms in the United States and abroad and present a description of how IT affects the level of overall concentration in the United States and foreign entry and competition. My results indicate a positive relation between foreign competition and IT adoption rates across US industries, that potentially explains the negative effects of IT on market shares of US domestic firms. The results challenge the common wisdom about IT and dominant firms in the United States economy and shed light on the observed productivity gaps between leaders and laggards. In particular, the mechanism supported from the data is one where large multinational firms gain from IT and displace domestic firms’ market shares leading to a reallocation of sales to incumbent multinationals that become more productive.