Devaluations may have an impact on multinational stock prices depending on the size of the particular country and whether they are anticipated or not. In an efficient market, predictable devaluations on small countries should not impact stock prices of large multinational companies. We analyze cummulative abnormal returns (CAR) to five devaluations in Venezuela within the context of stiff exchange controls. Our event study covers a period of five years and uses daily stock prices for up to 122 multinationals with Venezuelan subsidiaries. We find evidence of significant negative impacts on stock prices on various devaluations, reaching up to -1.75% over the event window. We interpret these results as evidence of market myopia, as they are driven by retained earnings on financial statements being converted into dollars at highly overvalued official rates, in spite of subsidiaries not having access to dollars at these prices for years prior to the devaluations.
Call Girls in New Ashok Nagar, (delhi) call me [9953056974] escort service 24X7
Fool´s gold: The case of multinationals in Venezuela
1. Fool´s
Gold:
The
case
of
multinationals
in
Venezuela
January,
2017
Miguel
Ángel
Santos
Instituto
de
Estudios
Superiores
en
Administración
(IESA)
Center
for
International
Development,
Harvard
University
miguel_santos@hks.harvard.edu
Dany Bahar
Inter-‐American
Development
Bank
Brookings
Institute
Carlos
Molina
Instituto
de
Estudios
Superiores
en
Administración
(IESA)
12. Venezuela
represents
0.42%
of
the
world´s
GDP!
01/13/2017 12Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Venezuela´s*Share*of*World´s*Gross*Domestic*Product
13. 13
• The
paper
within
the
context
of
the
literature
• Empirical
analysis:
Are
the
negative
impacts
reported
real?
• Robustness
checks:
Peer
groups
• What
happened?
• Conclusions
1301/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
14. The
paper
within
the
context
of
the
literature:
What
have
others
found?
• Ang and
Ghallab (1976):
• A
currency
devaluation
in
the
country
of
a
foreign
subsidiary
could
lead
to
a
“balance
sheet
effect”:
net
value
of
assets
of
the
subsidiary
in
foreign
currency
will
be
lower
after
a
devaluation
(one
time
events
– straightforward
to
calculate)
• Yet,
there
is
also
an
“income
statement
effect”:
a
decrease
in
the
expected
value
of
the
future
earnings
(in
local
currency)
of
the
subsidiary:
Recurring
impacts
on
financial
statements
and
take
time
to
understand
and
estimate
• Glen
(2002)
studies
24
emerging
markets
using
monthly
stock
returns,
and
finds
significant
negative
returns
in
the
months
before,
not
after,
the
devaluation
• Patro,
Wald
and
Wu
(2014)
using
data
from
stock
markets
in
27
countries
and
about
85
announcements
of
devaluations,
find
that
devaluations
were
anticipated
by
the
local
stock
markets,
with
significant
negative
abnormal
returns
occurring
even
one
year
prior
to
the
announcement
of
devaluations.
1401/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
15. 15
• The
paper
within
the
context
of
the
literature
• Empirical
analysis:
Are
the
negative
impacts
reported
real?
• Robustness
checks:
Peer
groups
• What
happened?
• Conclusions
1501/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
16. Event
study:
Are
there
negative
abnormal
returns
on
stock
prices
of
multinationals
(MNCs)
in
Venezuela
around
the
dates
of
these
devaluations?
• We
estimate
a
market
model
to
measure
expected
return
of
the
MNC
stocks
during
the
event
window.
As
in
Mackinlay (1997),
we
estimate
[1],
using
least
squares:
R"# = α" + β"R(# + ε"# [1]
• Event
window:
(-‐280,
-‐30)
• Cox
and
Peterson
(1994):
100
days
• Carow and
Kane
(2002):
200
days
• Mackinlay (1997)
suggests
250
days
for
the
estimation
window
[-‐280,-‐30]
We
then
estimate
the
abnormal
return
(AR)
as:
AR+ "# = R"# − α-" − β."R(# [2]
AR+ "# =
1601/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Actual
Return
-‐ Expected
return
17. Data
• We
searched
the
ORBIS
database
looking
for:
• Companies
trading
at
the
New
York
Stock
Exchange
(NYSE),
NASDAQ
Capital
Market,
or
NASDAQ
National
Market
• Companies
declaring
having
a
subsidiary
in
Venezuela,
own
in
more
than
25%
• Companies
having
daily
stock
return
data
reported
for
2010-‐2014
• Results
of
the
query:
• 122
multinational
companies
(2-‐digit
NAICS)
• NAICS
33:
37
Primary
Metal,
Fabricated
Metal,
and
Machinery
Manufacturing
• NAICS
32:
36
Paper,
Chemicals,
Plastics
and
Non-‐metallic
manufacturing
• NAICS
51:
8
Information
Technology
• NAICS
52:
7
Finance
and
Insurance
• NAICS
54:
7
Business,
Professional,
Scientific,
and
Technical
Services
• NAICS
31:
6
Food,
Beverages
and
Tobacco
• NAICS
42:
6
Wholesale
trade
• NAICS
56:
5
Administrative
Support,
Backoffice /
Waste
Management
• NAICS
48:
4
Transport
and
Warehousing
• Other
(6)
• 29
registered
in
CADIVI
1701/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
18. Distribution
of
the
122
MNCs
by
2-‐digit
NAICS
code
1801/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Primary,(Fabricated(Metal,(
Machinery
Paper(and(Chemicals
Information(Technology
Finance(and(Insurance
Professional,( Scientific,(Technical(
Services
Food,(Beverage(and(Tobacco
Wholesale(Trade
Administrative(Support(/(Waste(
Management
Transportation(and(Warehousing
Mining,(Quarrying,(Oil(and(Gas
Utilities
19. Distribution
of
the
122
MNCs
by
3-‐digit
NAICS
code:
Primary
and
Fabricated
Metal,
Machinery
Manufacturing
1901/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Primary,(Fabricated(Metal,(
Machinery
Paper(and(Chemicals
Information(Technology
Finance(and(Insurance
Professional,( Scientific,(Technical(
Services
Food,(Beverage(and(Tobacco
Wholesale(Trade
Administrative(Support(/(Waste(
Management
Transportation(and(Warehousing
Mining,(Quarrying,(Oil(and(Gas
Utilities
Machinery
Fabricated.Metal
Computer./.Electronics
Transportation
Miscellaneous
Electrical.Equipment.and.
Components
Primary.Metal
20. Distribution
of
the
122
MNCs
by
3-‐digit
NAICS
code:
Paper
and
Chemicals
2001/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Paper
Printing*and*Related
Chemical
Plastics*and*Rubber
Nonmetallic*Mineral
Primary,(Fabricated(Metal,(
Machinery
Paper(and(Chemicals
Information(Technology
Finance(and(Insurance
Professional,( Scientific,(Technical(
Services
Food,(Beverage(and(Tobacco
Wholesale(Trade
Administrative(Support(/(Waste(
Management
Transportation(and(Warehousing
Mining,(Quarrying,(Oil(and(Gas
Utilities
21. Five
events:
Five
devaluations
occurring
within
January
2010
and
March
2014
21
Event Date Details
1 Jan
8th,
2010
Dual
exchange
rate
system
implemented:
From 2.15
VEF/US$
to
2.50
VEF/US$
and
4.30
VEF/US$
2 December
30th,
2010 Exchange
rate
unified
to
4.30
VEF/US$
3 February
8th,
2013 Devaluation
from
4.30
to
6.30
VEF/US$
4 January
23rd,
2014 Creation
of
SICAD I
starting
at
11.30
VEF/US$
5 March
10th,
2014 Creation
of
SICAD
II
starting
at
51.86 VEF/US$
01/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
24. Companies
registering
the
largest
negative
significant
impacts
are
significantly
large
on
average
(US$8.5
billion)
to
be
impacted
by
a
market
like
Venezuela
2401/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
−.2 −.15 −.1 −.05 0
Cummulative Abnormal Returns
MIDDLEBY CORP
AVNET INC
TUPPERWARE BRANDS CORP
LEVEL 3 COMMUNICATIONS INC
MERCADOLIBRE INC
Event
1,
Window
[-‐3,+3]
−.08 −.06 −.04 −.02 0
Cummulative Abnormal Returns
INTERPUBLIC GROUP COS INC
ARVINMERITOR INC
TETRA TECHNOLOGIES INC
INTERVAL LEISURE GROUP INC
BROWN SHOE CO INC NEW
Event
2,
Window
[-‐3,+3]
Average
size:
US$8.5
billion
25. You
may
find
large
corporations
such
as
Xerox
(market
capitalization
10
billion)
or
Parker
Hannifin
(US$17.6
billion)
ridiculously
his
by
Venezuela
devaluations
2501/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
Event
4,
Window
[-‐3,+3]
Event
5,
Window
[-‐3,+3]
−.1 −.08 −.06 −.04 −.02 0
Cummulative Abnormal Returns
DONNELLEY R R & SONS CO
PARKER HANNIFIN CORP
BIGLARI HOLDINGS INC
HERBALIFE LTD
XEROX CORP
−.15 −.1 −.05 0
Cummulative Abnormal Returns
MERCADOLIBRE INC
ACTAVIS PLC
PROGRESS SOFTWARE CORP
TESCO CORP
HERBALIFE LTD
26. Findings
on
significant
negative
cumulative
abnormal
returns
(SNCAR)
All
sample
• Event
1
(2.15
devalued
to
2.60
and
4.30)
• 9
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
-‐0.67%
to
-‐1.48%
• Event
2
(2.60
unified
to
4.30)
• 7
out
of
10
event
windows
have
SNCAR
• Negative
abnormal
returns
ranging
from
-‐0.71%
to
-‐1.60%
• Event
3
(4.30
devalued
to
6.30)
• 1
out
of
10
event
windows
have
SNCAR
(-‐0.3%)
• Event
4
(SICAD
I
created
at
11.30
– first
trading
day)
• (First)
5
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
0.80%
to
1.15%
• Event
5
(SICAD
II
created
at
51.86
– first
trading
day)
• 5
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
0.40%
to
0.80%
2601/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
28. Findings
on
significant
negative
cumulative
abnormal
returns
(SNCAR)
Non-‐oil
companies
• Event
1
(2.15
devalued
to
2.60
and
4.30)
• 10
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
-‐0.64%
to
-‐1.68%
• Event
2
(2.60
unified
to
4.30)
• 8
out
of
10
event
windows
have
SNCAR
• Negative
abnormal
returns
ranging
from
-‐0.27%
to
-‐1.72%
• Event
3
(4.30
devalued
to
6.30)
• 1
out
of
10
event
windows
have
SNCAR
(-‐0.3%)
• Event
4
(SICAD
I
created
at
11.30
– first
trading
day)
• (First)
5
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
0.80%
to
1.07%
• Event
5
(SICAD
II
created
at
51.86
– first
trading
day)
• 5
out
of
10
event
windows
have
SNCAR
• SNCAR
ranging
from
0.40%
to
0.08%
2801/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
31. Findings
• Significant
negative
cumulative
abnormal
returns
for
devaluations
1,
2
and
4;
whose
impact
can
be
as
high
as
-‐1.72%
on
average
1
03/17/2016 BALAS
Conference
2016:
Most
likely
casualties
of
Dutch
disease 31
• As
expected,
impacts
are
higher
and
more
significant
for
the
non-‐oil
sample
2
• For
firms
registered
in
CADIVI,
only
devaluation
4
(SICAD
I)
have
significant
negative
abnormal
returns,
although
they
impact
is
higher
-‐2.20%
3
• For
firms
not-‐registered
in
CADIVI,
devaluations
1
and
2
are
particularly
significant,
with
significant
negative
abnormal
returns
as
high
as
1.89%
4
32. 32
• The
paper
within
the
context
of
the
literature
• Empirical
analysis:
Are
the
negative
impacts
reported
real?
• Robustness
checks:
Peer
groups
• What
happened?
• Conclusions
3201/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
33. Data
• We
paired
each
company
in
our
non-‐oil
sample
with
a
peer
following:
• Firms
not
having
Venezuelan
subsidiary
that
they
own
more
than
25%
• Most
similar
NAICS
code
(6-‐digit,
if
no
peers
moving
back
to
4-‐digits)
• Within
the
range
of
similar
companies,
we
chose
the
one
with
the
market
capitalization
that
is
closer
to
our
sample
firm
3301/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
35. 35
• The
paper
within
the
context
of
the
literature
• Empirical
analysis:
Are
the
negative
impacts
reported
real?
• Robustness
checks:
Peer
groups
• What
happened?
• Conclusions
3501/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
36. 36
3601/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Venezuela:;Inflation,;Devaluation;and;Depreciation
(Feb;2003=100,;in;logs)
Inflation Devaluation Depreciation
For
many
years
(2005-‐2010)
firms
increased
prices,
costs
and
profits
by
inflation,
and
translated
those
profits
at
lagging
official
exchange
ratesLogarithmic
Scale!
38. 38
3801/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
CADIVI
ALDs
for
dividend
repatriation
came
to
a
halt
by
2009,
but
profits
continued
to
be
recorded
at
official
rates
– didn’t
need
to
be
in
CADIVI
to
do
this!
0
200
400
600
800
1000
1200
III(2007
IV(2007
I(2008
II(2008
III2008
IV(2008
I(2009
II(2009
III2009
IV(2009
I(2010
II(2010
III2010
IV(2010
I(2011
II(2011
III2011
IV(2011
I(2012
II(2012
III2012
IV(2012
CADIVI:(Total(Authorization(to(Liquidate(Dollars((ALD)
(US$(million)
Private(External(Debt Foreign(Investment
39. 39
3901/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
In
the
meantime,
the
parallel
market
started
to
distance
itself
significantly
from
the
official
exchange
rate,
eventually
by
a
factor
of
10
by
2014,
1000
by
2015!
1
10
100
1000
10000
6$23$2010
8$31$2010
11$25$2010
2$21$2011
5$2$2011
7$4$2011
9$4$2011
11$6$2011
1$8$2012
3$11$2012
5$15$2012
7$16$2012
9$19$2012
11$22$2012
1$24$2013
5$23$2013
7$23$2013
9$22$2013
11$22$2013
1$23$2014
3$26$2014
5$26$2014
7$26$2014
9$25$2014
11$25$2014
1$26$2015
3$29$2015
5$29$2015
7$29$2015
9$30$2015
12$1$2015
1$31$2016
4$1$2016
6$1$2016
8$8$2016
10$8$2016
Venezuela:4Multiple4exchange4rates
(VEF4per4US$,42010$2016)
Black4market4XR4rate Official4XR SICAD4I SICAD4II
40. 40
• The
paper
within
the
context
of
the
literature
• Empirical
analysis:
Are
the
negative
impacts
reported
real?
• Robustness
checks:
Peer
groups
• What
happened?
• Conclusions
4001/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
41. Conclusions
• We
find
evidence
of
significant
negative
impacts
on
stock
prices
on
various
Venezuelan
devaluations,
reaching
up
average
across
the
sample
of
2.20%
for
CADIVI-‐registered
firms,
-‐1.89%
for
those
not
registered over
the
event
window.
• The
fact
that
you
did
not
even
have
to
be
registered
in
CADIVI
to
register
these
negative
returns
is
an
indication
that
profits
of
Venezuelan
subsidiaries
were
largely
overvalued
in
the
balance
sheet
of
MNCs,
when
in
fact
there
was
little
to
no
chance
of
realizing
those
profits
at
those
official
rates
• We
find
the
size
of
the
impacts
with
respect
to
the
size
of
the
MNCs
involved,
totally
out
of
proportion
with
respect
to
the
size
of
the
Venezuelan
market,
hinting
large
market
myopia
• This
is
not
a
paper
on
window
dressing,
is
a
paper
on
market
myopia
4101/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela
42. Work
in
progress
• Peer
groups
can
be
fine-‐tuned
and
defined
by
event,
not
for
the
whole
sample
• Why
the
impacts
on
CADIVI-‐registered
companies
occur
mostly
on
event
4
(SICAD
I),
and
companies
not-‐registered
in
CADIVI
are
mostly
hit
on
events
1
and
2?
• Are
there
any
specific
industry
effects?
Any
evidence
of
some
industries
being
more
affected
than
others?
4201/13/2017 Fool´s
gold:
The
case
of
multinationals
in
Venezuela