Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 510: The Euro Is Good After All: Corporate Evidence

Arturo Bris (), Yrjö Koskinen () and Mattias Nilsson ()
Additional contact information
Arturo Bris: Yale School of Management, Postal: 135 Prospect Street, New Haven, CT 06511-3729, USA
Yrjö Koskinen: Dept. of Finance, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Mattias Nilsson: Stockholm Institute for Financial Research, Postal: Wallingatan 11, SE-111 60 Stockholm, Sweden

Abstract: In this paper we study the changes in corporate valuation, investments, and financing choices induced by the formation of Economic and Monetary Union (EMU) in Europe. We use corporate-level data from ten countries that adopted the euro, the three EU countries that did not join EMU, as well as Norway and Switzerland. We show that the introduction of the euro has increased valuations for large firms in EMU countries, especially in countries that had experienced currency crises. Firm values have also increased for firms that were previously exposed to currency risks irrespective of size. Investments have increased for all firms, but the effects are bigger for large firms and for firms coming from countries with experiences of currency depreciations. The increase in investments has been financed mainly via debt issues. The evidence provided here supports the view that the introduction of the euro has lowered firms' cost of capital by eliminating currency risks among the countries that have adopted the common currency, and by further increasing capital market integration in Europe.

Keywords: Economic and Monetary Union (EMU); the euro; valuation; investment; debt; equity; cost of capital; currency risk

JEL-codes: F33; F36; G32

57 pages, August 8, 2002

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