On the Origins of the Multinational Premium

We study the relationship between management, multinational expansion, and risk premia. We document two facts: firms run by better managers are more likely to become multinationals (MNEs), and risk premia are higher for current and future MNEs than for firms that remain exclusively domestic. We develop a model in which endogenous matching between heterogeneous firms and managers jointly determines selection into foreign direct investment (FDI) and risk premia. Quantitatively, we use the model to examine how corporate taxation and distortions in the market for managerial talent affect multinational activity, firm risk exposure, and financial market outcomes. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.