The origins of the multinational premium: Managerial talent, firm risk, and corporate taxation

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.

Multinational corporations are the largest players in the global economy, yet the origins of their risk exposure remain poorly understood. A growing body of academic research documents that multinational firms earn higher stock returns than purely domestic firms – a pattern that raises natural questions about what drives their differential exposure to aggregate risk (Fillat and Garetto 2015, Esposito 2020). This issue has gained new relevance as policymakers grapple with how to regulate large global corporations. The OECD’s global minimum tax agreement represents one response to concerns about multinational profit-shifting. In the US, Congress has debated proposals ranging from higher taxes on foreign profits to levies triggered by elevated CEO-to-worker pay ratios. Both approaches target the same firms, but their effects depend critically on how corporations respond: not just to taxes themselves, but to the broader forces shaping international expansion and executive labour markets.

Management and multinational entry

Research has long established that multinational firms differ from domestic ones: they are larger, more productive, and more profitable (e.g. Bernard et al. 2008, Helpman et al. 2004). There is a large empirical literature studying the drivers of multinational entry, but none of these papers considers the importance of managerial characteristics.  

In recent work (Fillat and Garetto 2026), we argue that CEOs play a central role in multinational expansion, as they actively shape firms’ global presence through the expertise accumulated during their careers.

Consider Sergio Marchionne. Before taking over Fiat in 2004, he led a Swiss-based multinational specialising in inspection and certification services. His experience running a complex, internationally active firm gave him the strategic framework to orchestrate Fiat’s dramatic global expansion, including the acquisition of Chrysler in 2009. This kind of managerial know-how, we argue, matters systematically for which firms become multinationals and for the risks they carry.

Using a novel dataset combining firm balance sheets, stock returns, SEC filings on foreign subsidiaries, and detailed CEO employment histories for US publicly listed firms over 1993-2017, we establish two empirical findings.

First, firms run by CEOs with multinational expertise are more likely to expand abroad. A domestic firm whose CEO has previously guided another company through a transition from domestic to multinational status has a 5.2 percentage point higher probability of becoming multinational itself. For every additional country where a CEO has opened foreign affiliates in past roles, the probability that the firm she is currently managing becomes an MNE rises by 0.6 percentage points. Given that the average CEO with multinational expertise has expanded into roughly ten countries, this cumulative effect is substantial.

The mechanism appears to operate through fixed costs. Multinational expansion requires substantial upfront investments, including establishing foreign subsidiaries, navigating regulatory environments, and building distribution networks. We find that managerial expertise reduces these barriers: firms run by expert managers have lower fixed costs of foreign operations than firms run by non-expert managers.  This asymmetry suggests that managerial expertise facilitates navigating international expansion.

Second, future multinationals carry higher risk premia before they even expand. This is perhaps the most striking finding. Using stock return data, we show that firms that are currently domestic but will establish foreign affiliates in subsequent years (“future multinationals”) earn higher average returns and display higher market betas than firms remaining domestic throughout the sample period. This forward-looking risk premium exists when future multinationals are operationally indistinguishable from permanently domestic firms.

A framework linking managers, expansion, and risk

To explain these patterns, we develop a model integrating three elements: heterogeneous firm selection into multinational activity, a labour market for managerial talent with search frictions, and an asset pricing framework where risk premia emerge from exposure to aggregate consumption fluctuations.

The key insight, driven by the empirical findings, is that managers’ characteristics affect firms’ risk exposure through their impact on firm fixed costs. For domestic firms, hiring a high-ability manager increases the option value of future multinational expansion. This option, namely, the potential to enter foreign markets when conditions are favourable, loads onto aggregate risk. When the economy weakens, the option becomes less valuable precisely when investors’ marginal utility of consumption is high. Stockholders therefore demand higher returns to hold equity in firms with valuable expansion options.

For firms that are already multinational, the dynamic reverses. High-ability managers reduce ongoing fixed costs of foreign operations, lowering operating leverage and thereby reducing risk exposure. The model delivers a clean prediction: managerial ability amplifies the risk premia of domestic firms (through the option value channel) while dampening the risk premia of multinationals (through operating leverage).

Policy implications: Two taxes, different effects

Our framework has direct implications for corporate tax policy. We calibrate the model and evaluate two policies targeting large multinationals: a 25% tax on foreign profits, and a tax on profits of firms with CEO compensation above a given threshold (calibrated to have a direct impact on firm value that is equivalent to the one of the tax on foreign profits).

Figure 1 illustrates the effects of the two taxes on multinational entry. Panel A shows the baseline economy, where about half of firms are multinationals. Among MNEs, 47% are run by high-ability managers.

Panel B shows firm selection and firm-manager matches under a 25% tax on foreign profits. The share of multinationals falls sharply, from 51% to 39%, a decline of 12 percentage points. Among the remaining MNEs, the share with high-ability managers rises to 59%, reflecting tougher selection: only the most productive firms, those most likely to employ high-ability managers, can absorb the tax and remain profitable abroad.

Panel C shows the effects of a CEO pay tax. Because high-ability managers command salaries above the tax threshold, firms can respond by hiring lower-ability managers to avoid the levy. This option, which is unavailable under the foreign profits tax, dampens the contraction in multinational activity. The share of multinationals falls by only 3 percentage points, to 48%. The share of high-ability managers among MNEs rises modestly to 51%.

Importantly, the two taxes have opposite effects on aggregate risk. The foreign profits tax concentrates risk among surviving high-productivity multinationals, increasing the value-weighted market return. The CEO pay tax reduces aggregate risk exposure by selectively deterring high-ability managers from working at multinationals. Both taxes reduce firm profits by similar amounts, but they have different quantitative effects on multinational entry and stock prices, as they affect firms’ adjustment margins differently.

Figure 1 Effect of corporate taxes on firm selection and managerial allocation

Note: Each row shows the distribution of firms by productivity, with domestic firms on the left and multinationals on the right. Blue bars indicate firms with low-ability managers; red bars indicate firms with high-ability managers. Percentages in panel titles show the share of all firms in each category; percentages in boxes show the share of high-ability managers within each category.

Conclusions

These findings underscore that policies targeting large corporations have consequences extending beyond their direct fiscal impact. The allocation of managerial talent, firm selection into multinational status, and aggregate financial market outcomes are intertwined. Evaluating corporate tax policy without accounting for these linkages risks fundamentally misunderstanding its effects.

More broadly, understanding the relationship between management, firm expansion, and risk exposure offers insight into how the largest players in the global economy make decisions shaping both their own fortunes and the financial markets in which they participate.

Source : VOXeu