Overview

Using novel sources of data, I provide evidence on the impact of Information Technology on foreign competition and the impact of global shocks to U.S. firms’ profitability and equity valuations. Using industry-level variation in digital intensity, I uncover several empirical regularities over the past three decades: 1. More digitalized industries (excluding Information Technology producing sectors), have become more global and dominated by large multinationals. 2. Controlling for other common factors affecting asset prices, portfolios with exposure to industries with high digital intensity have on average 8-9 % higher annual stock returns. 3. The higher returns are driven by the returns of firms in industries with a large presence of foreign multinationals. I formalize these empirical regularities through a two-country general equilibrium asset pricing model where industries differ in the magnitude of multinational firms’ competition and digital intensity. Multinational firms in the model and in the data, operating outside of their headquarters country, are large and more productive and as a result adopt Information Technology to operate more efficiently. The model and the data are pointing to a novel risk premium due to the productivity enhancements of large and multinational firms from digitalization. In particular, the displacement risk for sales of unproductive incumbents due to foreign competition is systematically priced in the cross section of asset prices.