The Dark Side of Globalization : Evidence from the Impact of COVID-19 on Multinational Companies

The COVID-19 pandemic has led to economic and health crises (“twin crises”) worldwide. Using a sample of firms from 74 countries over the period January to August 2020, we examine stock price reactions of multinational corporations (MNCs) and purely domestic companies (DCs) to the crisis. We find that, on average, MNCs suffer a significantly larger decline in firm value relative to DCs during the stock market crisis caused by the pandemic, with their significant post-crisis recovery not fully offseting the decline. The relative underperformance of MNCs holds across all regions, except North America and Latin America & the Caribbean, and across all Fama–French industries, except chemicals, healthcare/drugs, and finance. We then examine the effect of government responses on the valuation gap and find that stronger government responses exacerbate the MNC under-performance. Finally, we show that a stronger financial system mitigates negative crisis returns, especially under stronger government reponses, while real factors, such as the firm’s supply chain, investments in human capital, research and development exacerbate negative crisis returns. Our findings have important implications for managers of MNCs and government policymakers alike and contribute to studies on the international diversification–performance relation by demonstrating a dark side of internationalization during a tail-risk event