Fool’s Gold: Currency Devaluations and Stock Prices of Multinational Companies Operating in Venezuela

CID Research Fellow & Graduate Student Working Paper No. 83

Dany Bahar, Carlos Alberto Molina, and Miguel Angel Santos
May 2017


Devaluations may have an impact on multinational stock prices depending on the size of the 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 cumulative abnormal returns (CAR) to five devaluations in Venezuela within the context of stiff exchange controls. Our event study covers five years and uses daily stock prices for 110 multinationals with Venezuelan subsidiaries. We find evidence of significant negative cumulative abnormal returns on stock prices on three devaluations, reaching up to 2.10% over the event window. We interpret these results as evidence of market myopia, as they are driven by financial statements being converted into dollars at highly overvalued official rates, despite subsidiaries not having access to dollars at these prices.

Keywords: devaluation, market efficiency, market myopia, multinationals, abnormal returns, exchange controls

JEL codes: G14, G15

Affiliated Program: Growth Lab