Working Paper: CEPR ID: DP3910
Authors: Arturo Bris; Yrj Koskinen; Mattias Nilsson
Abstract: In this Paper we study the changes in corporate valuation induced by the formation of Economic and Monetary Union (EMU) in Europe. We use corporate-level data from ten countries that adopted the euro, the three EU countries that did not join EMU, as well as Norway and Switzerland. We show that the introduction of the euro has increased Tobin's Q-ratios in EMU countries by 7.4%. The effects prevail even if we account for the decrease in long-term interest rates. The increases in Tobin's Q are larger for firms that are ex-ante expected to benefit more, i.e. firms from countries that had weak currencies and firms that were exposed to intra-European currency risks. Finally, the increases are also more significant for firms that are financially unconstrained. The evidence provided here supports the view that the introduction of the euro has lowered firms' cost of capital in EMU-countries.
Keywords: cost of capital; currency risk; currency union; economic and monetary union; EMU; the euro; valuation
JEL Codes: F33; F36; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of the euro (F36) | increase in Tobin's Q ratios (G19) |
| introduction of the euro (F36) | lower cost of capital for firms (G32) |
| introduction of the euro (F36) | increase in Tobin's Q ratios for firms expected to benefit more (D25) |
| introduction of the euro (F36) | increase in Tobin's Q ratios for financially unconstrained firms (D25) |
| long-term interest rates (E43) | increase in Tobin's Q ratios (G19) |