RFS Advance Access originally published online on December 24, 2008
Review of Financial Studies 2009 22(8):3171-3209; doi:10.1093/rfs/hhn101
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The Euro and Corporate Valuations
IMD, Yale International Center for Finance, and ECGI
Boston University School of Management and CEPR
University of Colorado at Boulder
Send correspondence to Yrjö Koskinen, Boston University School of Management, 595 Commonwealth Avenue, Boston, MA 02215; telephone: (617)-353-9775; fax: (617)-353-6667; E-mail: yrjo{at}bu.edu
JEL Classification: F33, F36, G32
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Abstract |
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In this paper, we study the changes in corporate valuations induced by the adoption of the euro as the common currency in Europe. We use corporate-level data from seventeen European countries, of which eleven adopted the euro. We show that the introduction of the euro has increased Tobin's Q-ratios by 17.1% in the {euro-area} countries that previously had weak currencies. Part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity. The increases in Tobin's Q are larger for firms that would be harmed by currency devaluations.
We thank Malcolm Baker, Söhnke Bartram, Judy Chevalier, Mariassunta Giannetti, Leo de Haan, Huong Higgins, Massimo Massa, Darius Miller, Geert Rouwenhorst, Matthew Spiegel, Rohan Williamson, Bernard Yeung, and audiences at Stockholm School of Economics, Bank of Finland, NYU Salomon Center Conference on the Euro, Yale School of Management, the NBER Summer Institute in Cambridge, Darden, Bank of Sweden, Uppsala, Vanderbilt, Norwegian School of Economics, Purdue, University of Arizona, University of Utah, WPI, the ECB-CFS Workshop in Helsinki, the 2003 International Finance Conference in Atlanta, the 2003 Global Investment Forum in Banff, the 2003 SNEE Symposium in Mölle, the 2003 WFA meetings in Los Cabos, Bank of Norway, and Stockholm Institute for Financial Research for helpful comments. We also thank the editor (Robert McDonald) and two anonymous referees for helpful comments and suggestions, and Vanessa Janowski and Teresa Kwon for excellent research assistance. An earlier version of this paper has been circulated under the title of "The Euro Is Good After All: Evidence from Corporate Valuations." The project was initiated while Nilsson was visiting the International Center for Finance (ICF) at Yale School of Management. He wishes to thank the ICF for its hospitality during his stay. This article is produced as a part of a CEPR project on Understanding Financial Architecture: Legal Framework, Political Environment and Economic Efficiency, funded by the European Commission under the Human Potential—Research Training Network program (contract no. HPRN-CT-2000-00064).