key: cord-0768492-bhygtcba authors: Nagarajan, Viswanathan; Sharma, Prateek title: Firm internationalization and long‐term impact of the Covid‐19 pandemic date: 2021-03-15 journal: MDE Manage Decis Econ DOI: 10.1002/mde.3321 sha: c434afa1d0deb180c321ecb9624d0b2aa4fe6db4 doc_id: 768492 cord_uid: bhygtcba We infer market expectations regarding the relationship between firm internationalization and the long‐term impact of the Covid‐19 pandemic by using a novel approach to decompose global stock prices into their short‐ and long‐term value components. In general, firms with a greater proportion of foreign assets show greater losses in the long‐term value component, suggesting investor expectations of higher supply‐chain restructuring costs for such firms. Also, investors appear to have priced in the likely permanent benefits of such restructuring for firms from emerging Asian economies, as these economies may be well‐placed as alternative sourcing bases to China. We infer market expectations regarding the relationship between firm internationalization and the long-term impact of the Covid-19 pandemic by using a novel approach to decompose global stock prices into their short-and long-term value components. In general, firms with a greater proportion of foreign assets show greater losses in the long-term value component, suggesting investor expectations of higher supply-chain restructuring costs for such firms. Also, investors appear to have priced in the likely permanent benefits of such restructuring for firms from emerging Asian economies, as these economies may be well-placed as alternative sourcing bases to China. The Covid-19 pandemic has had a significant negative impact on global economic activity and global supply chains. The World Economic Outlook update published in June 2020 by the International Monetary Fund projects a 4.9% decline in global GDP in 2020 (IMF, 2020) . World merchandise trade volumes are expected to be at least 13% lower during 2020 compared to 2019 (WTO, 2020) . Although global economic output and supply chain performance are expected to recover to prepandemic levels in course of time, other long-term consequences of the pandemic are less clear. The initial supply shock originating in China and the subsequent demand shock caused by worldwide lockdowns highlighted vulnerabilities in global supply chains and production strategies (Shih, 2020) . This could make economic agents reassess risks inherent in global supply chains and result in a long-term impact on globalization trends. Against the backdrop of a slowdown in globalization after the global financial crisis and recent geopolitical developments like Brexit and the United States-China trade war, a pandemic-driven impact on global supply chains could have wide-ranging consequences for the world economy and globalization. In this paper, we estimate changes in the long-term components of equity values of firms across multiple countries and industries after the pandemic set in. We then relate these changes to measures of firm internationalization to test whether investors expect the pandemic to have lasting effects on global supply chains, and examine the value implications of such effects. The world economy became increasingly globalized over the 19th and 20th centuries. After a decline during the first half of the 20th century, international trade has seen a consistent upward drift until recently (Altman & Bastian, 2019) . Foreign direct investment (FDI) as a percentage of world GDP has also risen consistently since the 1980s (Altman & Bastian, 2019) . Although there are many barriers to integration of economies, long-term trends in trade, capital flows, labor movements, and knowledge transfers show clear increases in globalization (Ghemawat, 2003) . Firms increasingly structure their operations as global value chains, of which China-based operations are a significant part (Buckley, 2016) . However, the period since the global financial crisis has witnessed some slowing in globalization (Claessens & Van Horen, 2015; Van Bergeijk, 2019) . Global imports of goods and services peaked at 30.2% of GDP in 2007; similarly, global FDI peaked at a weighted average of 5.3% of GDP in 2007 (Witt, 2019) . Multiparameter measures like the DHL Connectedness Index 1 (Altman & Bastian, 2019) and the KOF Globalization Index 2 (Gygli et al., 2019 ) also indicate a slowdown in globalization growth after the crisis. This slowing in globalization has been attributed to various reasons. The global financial crisis led to a decline in labor costs in developed economies, causing multinational enterprises (MNEs) to backshore 3 operations to their home countries (Delis et al., 2019) . MNEs may also backshore under such conditions to fulfill their corporate social responsibility (CSR) obligations and to satisfy home country political establishments (Delis et al., 2019) . Further, digitalization-based developments in manufacturing technology have enabled the fourth industrial revolution (or Industry 4.0). This has led to improvements in manufacturing costs, flexibility, and quality, thereby providing an added incentive for backshoring (Ancarani et al., 2019; Backer & Flaig, 2017; Dachs et al., 2019; Economist, 2020b; Seric & Winkler, 2020) . In recent years, public opinion against globalization and immigration has also increased (Witt, 2019) . Nationalist sentiment and populist government in various countries have manifested themselves in actions like Brexit and the United States-China trade war (Delis et al., 2019; Economist, 2020b; Witt, 2019) . It is against this backdrop that the Covid-19 pandemic has now affected global supply chains and capital flows. World merchandise trade volumes declined by about 17% during the first 5 months of 2020 (CPB, 2020) . The World Trade Organization (WTO) which initially forecast a 13%-32% drop in global merchandise trade during 2020 now finds the optimistic outcome more likely and expects recovery to the prepandemic trend by 2021 (WTO, 2020) . Worse hit is global FDI which is projected to fall by 40% in 2020-2021 and start recovering only by 2022 (UNCTAD, 2020) . Would these declines be temporary with globalization and global supply chains returning to prepandemic levels once the pandemic is controlled? Or would the pandemic leave a lasting impact on them? This is the question we explore in this paper. Witt (2019) points out that globalization trends are determined not only by actions of sovereign countries; they are also determined by individuals, firms, international organizations, and other nonstate actors. Thus, supply chain restructuring could be a consequence of actions initiated by countries, perhaps under the influence of other economic agents like citizens, firms, and nongovernmental organizations. But such restructuring may also be more directly a result of decisions taken by firms to backshore and/or reshore. Kedia and Mukherjee (2009) theorize that for offshoring, firms need to perceive value in disintegrating their value chains and relocating some activities to other geographies. Further, even when they choose to offshore an activity, firms decide whether to keep the activity captive or outsource it to an external agency. The internalization theory of globalization posits that firms trade off production cost advantages against the transaction costs involved in governing a value chain where certain components are external to the firm (Buckley, 2016) . When faced with exogenous operational challenges, firms often opt to relocate (Manning, 2014) . Firms can seek to gather more information regarding such potential challenges; however, some uncertainties may not permit enough prior knowledge (Buckley, 2016) and firms may change their risk preferences as more information becomes available (Buckley & Strange, 2011) . Globalization is associated with an increased risk of supply chain disruptions (Amankwah-Amoah & Wang, 2019; López & Ishizaka, 2019) and the pandemic has highlighted this. Firms may therefore respond by diversifying production, sourcing, and logistics (Caligiuri et al., 2020; Sharma et al., 2020) and reducing exposure to specialized assets overseas (Verbeke, 2020) . This may imply the initiation of measures like backshoring and reshoring, even though such strategies might result in higher input costs and lower productivity (Bertasiute et al., 2020) . These decisions may also be prompted by public opinion, political pressure, and government action. The pandemic has increased pressures for governments to take steps to mitigate supply chain disruptions and increase domestic employment (Faiola, 2020) . In the words of Carmen Reinhart, Chief Economist of the World Bank, "the 2008-2009 crisis gave globalization a big hit, as did Brexit, as did the US-China trade war, but Covid is taking it to a new level" (Ward, 2020, May 21) . But there are contrary views too. Altman (2020) believes that globalization and anti-globalization pressures will coexist and globalization gains made over the last seven decades will largely survive, particularly because more globalized economies enjoy better economic growth. He also argues that trends like e-commerce and remote working that the pandemic has necessitated may even aid the cause of offshoring and trade in goods and services. As Richard N. Haass, President of the Council on Foreign Relations of the World Economic Forum argues, "Globalization is not a problem for governments to solve; it is a reality to be managed" (Haass, 2020) . Estimating long-term effects of the pandemic on the various globalization metrics like trade and capital flows requires data that will not be available for some time to come. Instead, we rely on signals provided by equity markets to get early indications of potential effects of the pandemic on global supply chains and thereby, on globalization. Supply chain disruptions are known to adversely impact shareholder wealth (Hendricks & Singhal, 2003 , and it would be reasonable to expect similar observations consequent to the pandemic. But what we seek to understand is if any part of this impact relates to the long-term component of firm values, as against the short-term impact that results from weak firm performance during the period of the pandemic. We develop a novel approach to decompose the equity values of firms into their short-term and long-term components by adapting the standard implied cost of equity models and apply this approach to our sample. We then study the changes in the long-term components of the equity values of firms between December 2019 and June 2020. The intervening period from January to May 2020 was when the disease spread across various geographies and includes the date of formal announcement of the pandemic by the Director-General of the World Health Organization (WHO; Ghebreyesus, 2020) . We interpret the changes in the long-term component of equity value as market expectations of the long-term economic consequences of the pandemic. Thereafter, we examine whether the changes in value are related to the degree of internationalization of a firm. We find that changes in the long-term component of equity value vary across economic regions and industries. Also, there are regional variations in the performances of industries. While industries like healthcare services and equipment, pharmaceuticals and medical research, and food and drug retailing performed relatively well across regions, sectors like automobiles, mineral resources, real estate, banking and investment services, and fossil fuels performed relatively poorly across regions. Ceteris paribus, firms with greater proportions of foreign assets, suffered larger losses to the long-term components of their value. We attribute this to the higher costs they would incur for restructuring their supply chains. In contrast, firms with greater proportions of foreign sales suffered lower losses to the long-term components of their value. This may be on account of the greater ability of such firms to weather recessionary conditions as geographic market diversification provides more stability in revenues and insulation from the impact of the pandemic. We also study how the relations between internationalization indicators and changes in equity value vary across four major economic regions-the United States, Japan, China, and Emerging Asia (excluding China). The relationship between the proportion of foreign assets and change in the long-term component of equity value is negative across all regions, although it is not statistically significant for Chinese firms. Further, we find that the positive relation between the proportion of foreign sales and the change in long-term component of equity value is statistically significant only for firms belonging to emerging Asian economies. We suggest that this is because firms from these economies are more likely to benefit from restructuring of global supply chains as these economies may be well-placed as alternative sourcing bases to China; and among these firms, those that already have significant foreign sales are better positioned to capitalize on such opportunities. The relation between changes in the long-term component of value and firm internationalization cannot be explained by the standard determinants of equity returns, or industry-specific or region-specific shocks. The results are also robust to potential endogeneity concerns. This paper extends the nascent literature that studies the economic consequences of the Covid-19 pandemic. Also, it contributes to the stream of international business literature which explores emerging trends in globalization and management of supply chain risks. We use changes in equity valuations to evaluate market expectations about the economic impact of the Covid-19 pandemic on businesses, and how this impact varies across different regions and industries. We also examine whether the degree of firm internationalization explains the changes in valuation. From a methodological perspective, this paper proposes a novel approach to decompose equity values into their short-and long-term components by extending well-established implied cost of equity models used in the accounting and finance literature. This approach allows us to distinguish businesses on which the pandemic's impact is likely to be transient from those that are likely to experience a more persistent impact. The rest of the paper is structured as follows. In Section 2, we present relevant theory and hypotheses. In Section 3, we describe the data, and in Section 4, we outline the methodology used in this analysis. In Section 5, we present and discuss our results. Section 6 concludes. Supply chain disruptions are a major source of business risk and owing to globalization and offshoring, modern supply chains are more susceptible to disruption (Amankwah-Amoah & Wang, 2019). The risks in tightly integrated global supply chains can be accentuated by major geo-political, weather, and health-related events because events which affect one part of the supply chain have repercussions in other parts (Manuj & Mentzer, 2008) . Offshoring results in relatively inflexible and financially inefficient supply chains, which are less resilient to disruptions (López & Ishizaka, 2019) . With adequate foresight, firms would accurately factor in the likelihood of uncertain events like pandemics when designing their global supply chains. However, although firms do address uncertainty by gathering information on the probability distribution of the risks and using such knowledge for decision-making, some uncertainties are unknowable ex ante (Buckley, 2016) . Moreover, as conditions change and new information becomes available, managers and consequently firms may change their risk preferences (Buckley & Strange, 2011) . Entrepreneurs too respond to environmental uncertainty by modifying the scope of the firm and changing the way they do business (Reymen et al., 2015) . Finance literature shows that prolonged periods of stability in financial markets can result in increased risk-taking (Danielsson et al., 2018) , and crises provide investors with "wake-up calls" which make them reassess expectations (Bekaert et al., 2014) . The Covid-19 pandemic may have resulted in reassessments by firms of risks inherent in their supply chains . This could make firms take long-term measures to modify their global value chains by diversifying production, sourcing, and logistics (Caligiuri et al., 2020; Sharma et al., 2020) . The higher level of uncontrollable risk highlighted by the pandemic may cause firms to reduce investments in specialized assets overseas (Verbeke, 2020) , through the exercise of strategic choices like backshoring and reshoring. Although firms with offshored operations have the option of responding to operational challenges by mitigating or tolerating them, they often choose the relocation option especially when the challenge is exogenous (Manning, 2014) . Firms would restructure their supply chains if they estimate that the cost of these measures is lower than the cost of uncertainties and disruption associated with continuation of their existing supply chain structures (Kedia & Mukherjee, 2009 ). They may also reevaluate decisions to outsource activities based on the trade-off between production cost advantages of outsourcing and the transaction costs involved in governing a value chain where certain components are external to the firm (Buckley, 2016) . Reorganization of supply chains by firms can also be expected as a result of public opinion, political pressure, and government action (Delis et al., 2019) . The pandemic has resulted in calls for governments to protect value chains, reduce dependency on offshoring, and bring jobs back home (Faiola, 2020; . Countries which have initiated steps in this direction include EU members, India, Japan, and the United States (Economist, 2020b). For instance, Japan announced subsidies for firms that would backshore production facilities (Denyer, 2020) . Many countries have also announced measures to guard against acquisition of firms by foreign investors (Economist, 2020a). A case in point is the amendment to Germany's Foreign Trade and Payments Ordinance tightening notification requirements for acquisition of substantial stakes by foreigners in the German healthcare sector. Contrary to the above, some researchers have also argued that when faced with an exogenous shock, persevering with a wellconsidered existing strategy is preferable to changing strategic direction (Li & Tallman, 2011; Wenzel et al., 2020) . Significant organizational changes implemented following economic crises could prove counter-productive as the firm may not be able to handle this additional complexity at a time when it also has to deal with other challenges thrown up by the crisis (Chakrabarti, 2015) . So it is also possible that firms may opt not to make long-lasting modifications to their supply chains following the pandemic. If reconfiguration of its supply chain is the preferred response of a firm to the pandemic, exercising this option would require the firm to incur certain costs. The costs involved could relate to factors such as wages, labor productivity, taxes, customs duties, currency fluctuations, and shipping (Chen & Hu, 2017; Tate et al., 2014) . Apart from these recurring cost implications, supply chain restructuring also involves one-time costs of switching and set-up (Brandon-Jones et al., 2017; Tate et al., 2014) . These costs would result in a decrease in the value of the firm relative to the pre-pandemic scenario. We expect that the pandemic would result in considerable changes to the global supply chains of firms and these changes would have material impact on their valuations. In particular, firms which have more foreign assets would incur greater one-time and recurring costs for reconfiguring their supply chain and would therefore suffer a greater value loss. This value loss would not pertain only to the period when the pandemic continues; it would also affect firms in the long term. Based on the foregoing discussion, we propose the following hypothesis. Hypothesis 1. Firms having a high ratio of foreign assets to total assets would suffer higher losses in the long-term component of their value than similar firms having a low ratio of foreign assets to total assets. The ratios of foreign assets to total assets and foreign sales to total sales are widely used as measures of the degree of firm internationalization (see, for example, Marshall et al. (2020); Ruigrok et al. (2007) ). Although the former captures the reliance of the firm on foreign resources, the latter captures reliance on foreign consumer markets (Attig et al., 2016; Sanders & Carpenter, 1998; Sullivan, 1994) . Foreign assets of a firm may relate at least partly to its global supply chain from which it sources goods or services to serve its markets elsewhere, but foreign sales are an indicator of the extent to which the firm's sales are globally diversified. Corporate diversification across industries has traditionally been viewed as value destructive (Berger & Ofek, 1995; Comment & Jarrell, 1995; Lang & Stulz, 1994) . However, recent evidence suggests that diversified firms are better-positioned to weather recessionary conditions, both due to their better access to internal and external capital markets and the improved efficiency of their internal capital markets during recessions (Gopalan & Xie, 2011; Hovakimian, 2011; Kuppuswamy & Villalonga, 2016) . During economic downturns, diversified conglomerates gain value relative to comparable focused firms (Kuppuswamy & Villalonga, 2016) , especially when the conglomerates are based in regions with more developed capital markets (Rudolph & Schwetzler, 2013) . Though less studied than industrial diversification, the findings regarding global diversification are also similar. Globally diversified firms display a valuation discount relative to single-country firms (Denis et al., 2002) , but this discount decreases in recessionary conditions (Volkov & Smith, 2015) . They are also more capable of riding out recessions without divesting their international assets (Hitt et al., 2016) . Therefore, we expect that firms with more globally diversified sales would be less affected by the pandemic, especially if they hail from emerging economies. Consequently, the long-term component of value would grow more (or show smaller losses) for firms which have more foreign sales in their revenue portfolio. This leads us to our second hypothesis. Hypothesis 2. Firms having a high ratio of foreign sales to total sales would enjoy higher gains in the long-term component of their value than similar firms having a low ratio of foreign sales to total sales. Our initial sample comprises all publicly listed firms available on the Thomson Reuters Datastream database from the four regions considered in our analysis-the United States, Japan, China, and Emerging Asia (excluding China). We use the S&P Dow Jones Indices' 2018 Country Classification to identify emerging market countries within Asia and drop those countries which have fewer than 30 firms that meet all the data requirements (described below). We believe that these regions provide us a good setting for the study. The United States and Japan are developed economies which are home to many globalized firms as also large consumer markets which rely on global supply chains. Chinese firms are a key component of the supply chains which feed these developed economies, whereas Emerging Asia (excluding China) comprises countries which could be alternative sourcing bases to China and therefore could be expected to benefit from any reconfiguration of global supply chains. For each firm, over the period from October 1, 2019, to June 30, 2020, we collect daily data on stock prices, I/B/E/S analyst consensus forecasts of earnings for financial years 2020 and 2021 (EPS 1 and EPS 2 ), forecasts of long term earnings growth (LTG), stock beta, stock momentum, size, and ratio of book value of equity to market value of equity. Stock betas are estimated by regressing stock returns against returns of the corresponding market index for the past 60 months. Stock momentum is measured as the trailing 12-month return skipping the most recent month. Size is the logarithm of market value of equity. We exclude those firms for which any one of these variables is not available. Industries are classified based on the four-digit level of the Thomson Reuters Business Classification (TRBC) scheme and we drop those industries which have less than 30 firms. The equity value decomposition we carry out (described in Appendix S1) requires the cost of equity as an input. We use four implied cost of equity models which are widely used in the accounting and finance literature (described in Appendix S2). Some additional constraints on our sample firms are required to implement these models. Following earlier literature (e.g., Boubakri et al. (2014) ; Cao (2017) ; El Ghoul et al. (2011)), we consider only firms with a positive book value of equity and for which EPS 2 > EPS 1 ≥ 0. Although the condition that EPS 2 be greater than EPS 1 is required for implementing the Ohlson and Juettner-Nauroth (2005) and Easton (2004) Our empirical approach is based on studying changes in the values of stocks after the pandemic established itself and relating these changes to measures of internationalization of firms. By doing so, we aim to decipher market opinion regarding the likely impact of the pandemic on global supply chains. However, a conventional study of changes in the prices of stocks may be insufficient for the purpose since any changes we observe could merely be due to the immediate demandside and supply-side shocks caused by the pandemic. If these shocks are transient, then corporate earnings will recover as the pandemic subsides such that there will be no lasting effect on the long-term earning potential of businesses. In contrast, more persistent effects, We implement the decomposition of stock values by estimating the present value of the stream of dividends generated from the expected earnings of a particular future year. This stream includes the dividend that directly pertains to that year's earnings and all subsequent dividends generated by reinvesting some portion of that year's earnings. We provide a detailed description of the method used for equity value decomposition in Appendix S1. For discounting the stream of dividends, we require an estimate of the cost of equity of the sample firm. We obtain this by using well-established models which estimate the cost of equity implied by prevailing stock prices considered in conjunction with analyst forecasts of earnings per share. The models we use include those of Easton (2004) Thomas (2001), and we provide details on the implementation of these models in Appendix S2. We use stock price data for the period from October 1, 2019, to December 31, 2019, to estimate implied cost of equity using each of the four models mentioned above. This period is suitable as an estimation period because it was shortly before the pandemic. We calculate implied cost of equity for every day when the stock was traded during the estimation period and use the average of these implied cost of equity estimates for value decomposition. Further, although supply chain disruptions result in an increase in total equity risk, they do not have a significant impact on systematic equity risk (Hendricks & Singhal, 2005) , which is directly relevant to cost of equity. Even when costs of equity have increased during financial crises, such increases have been temporary (Boubakri et al., 2010; Breuer et al., 2018) . Therefore, the implied cost of equity during the period immediately prior to the pandemic may be a good estimate of the cost of equity after its onset. For each stock, we estimate cost of equity using each of the four models-Ohlson and Juettner-Nauroth (2005) We estimate the following model to measure the effects of firm internationalization on the change in long-term component of equity value. Change LTCk = β 0 + β 1 :FATA k + β 2 :FSTS k + β 3 :Beta k + β 4 :Size k + β 5 :Book−to−Market k + β 6 :Momentum k + β 7 :Industry Effects + β 8 :Region Effects + β 9 :Country Effects + k , where the subscript k stands for the firm. Based on our hypotheses, the independent variables of interest are FATA, the ratio of foreign assets to total assets, and FSTS, the ratio of foreign sales to total sales. We run regressions using both the independent variables separately as well as jointly. We also run similar regressions using Change Totalk as the dependent variable. All models are estimated using robust regression to mitigate the effect of outliers. We also run instrumental variable regressions to address the possibility of endogeneity. We control for parameters which are known to be related to stock returns, namely the beta of the stock (Beta), the natural loga- (2015)). (Panel G) . Also, the interaction of region and industry is statistically significant which shows that there are regional variations in the performance of industries. A closer look at interindustry variation across the four regions ( Note. This table reports regression coefficients, and the corresponding t-statistics are presented in parentheses below the coefficients. All regression models are estimated with region, country, and industry fixed effects that are not reported for brevity. "Easton," "OJN," "GLS," and "CT" refer to value decompositions done using implied costs of equity as estimated using the Easton (2004) , Ohlson and Juettner-Nauroth (2005) , Gebhardt et al. (2001) , and Claus and Thomas (2001) models respectively. *Statistical significance at 10% level. **Statistical significance at 5% level. ***Statistical significance at 1% level. retailing performed relatively well across regions. These are sectors that either became more relevant due to the pandemic or continued to maintain their relevance for consumers despite the pandemic. At the other end are sectors like automobiles, mineral resources, real estate, banking and investment services, and fossil fuels which performed relatively poorly across regions. We now turn to our main hypotheses regarding the relationships between measures of firm internationalization and stock returns after the onset of the pandemic. In Panels A and B of Table 3, However, we do not observe statistically significant results using FSTS as the independent variable ( Krapl (2015) . It may be noted that all the models in Table 3 and subsequent tables are estimated using robust regression to mitigate the effect of outliers. Although not the focus of our study, it is interesting to observe the signs of the coefficients for some of our control variables. Normally, Beta and Book to Market are expected to be positively correlated with stock returns, whereas Size is expected to be F I G U R E 1 Variation in total returns and long term returns across industries negatively correlated with stock returns. However, it has been observed that in times of crisis, there is a flight-to-safety which increases demand for less risky stocks (i.e., stocks with low Beta, low Book to Market, and high Size), thereby increasing prices of such stocks and reversing the relationships between measures of systematic risk and stock returns (Ghysels et al., 2014) . The signs we observe for the coefficients of these control variables are in line with such behavior of investors. Figure 1 presents the coefficients for industry effects for regression models 2 and 5 reported in Table 3 . The dependent variable in model 2 is the change in the long-term value component (estimated using the Ohlson and Juettner-Nauroth (2005) model) and the dependent variable in model 5 is the change in total value. All industry coefficients presented in Figure 1 are relative to the "Applied Resources" industry, which is arbitrarily chosen as the reference category. Unlike the mean returns for various industry groups reported in Table 2, these industry coefficients control for region and country effects as well as firm-specific explanatory variables such as stock beta, momentum, book-to-market ratio, and the internationalization variables. We find that the three best performing industries are pharmaceuticals and medical research, food and drug retailing, and software and IT services, whereas the bottom three industries are insurance, real estate and fossil fuels. This is perhaps expected owing to nature of the healthcare crisis and work from home trends emerging from lockdowns across the globe. Although commercial real estate such as office space and malls suffer from lockdowns, work from home trends have made tenants move to suburbs and thus placed downward pressure on occupancies and rents in residential real estate in cities (Fung, 2020; Putzier & Maurer, 2020) . Demand for online services and digital infrastructure has exploded (Strusani & Houngbonon, 2020) , whereas fossil fuel demand has plummeted as a significant proportion of workforce works remotely (Prabheesh, Padhan & Garg, 2020) . A comparison of changes in the long-term component of value and total value provides a more nuanced interpretation of the market expectations imputed in stock valuations. Although valuations of fossil fuel stocks have declined sharply, the impact on the long-term component of value is smaller than on total value. This implies an expectation of at least partial recovery in oil demand and prices as the pandemic subsides, and is consistent with the upward sloping term structure of crude oil futures prices that factor at least a partial recovery in crude prices. Note. This table reports regression coefficients, and the corresponding t-statistics are presented in parentheses below the coefficients. All regression models are estimated with region, country, and industry fixed effects that are not reported for brevity. *Statistical significance at 10% level. **Statistical significance at 5% level. ***Statistical significance at 1% level. In Table 4 , we take a closer look at variations across various economic regions in the relationships between internationalization measures and changes in value. 4 We find that FATA has a negative relationship with stock returns across regions, and the relationship is statistically significant for all regions except China. 5 We also note that FSTS has a statistically significant positive relationship only for firms from Emerging Asia. This could be on account of firms from Emerging Asia being more likely to benefit from restructuring of global supply chains as these economies are well-placed as alternative sourcing bases to China (Cohen et al., 2018; Cohen & Lee, 2020) . Firms which already have significant foreign sales may better understand their customers and market (Gaur et al., 2014; Mudambi & Navarra, 2004) and be more innovative (Wu et al., 2016) and hence be better placed to gain from such restructuring-led opportunities. Further, geographical diversification of sales across countries provides firms from emerging economies more stability in revenues (Hitt et al., 2016) . The concern regarding the direction of causality between firm internationalization and our outcome variables is somewhat mitigated by the fact that our explanatory variables are measured 6 months prior to the outcome variables. In addition, degree of internationalization is a relatively stable firm characteristic. Nonetheless, to examine the robustness of our results to potential endogeneity issues, we estimate additional two-stage least-squares instrumental variable regres- Note. This table reports regression coefficients, and the corresponding t-statistics are presented in parentheses below the coefficients. All regression models are estimated with region, country, and industry fixed effects that are not reported for brevity. *Statistical significance at 10% level. **Statistical significance at 5% level. ***Statistical significance at 1% level. implied cost of equity of firms and applied them to decompose stock prices into the values emanating from expected earnings in the shortterm (the years 2020 and 2021) and over the long-term (expected earnings after the year 2021). As may be expected, we find that there are inter-industry and inter-economy variations in changes to the long-term components of equity values of firms after the onset of the pandemic. Firms with higher proportions of foreign assets which may incur more costs to restructure their supply chains lost a greater proportion of their longterm equity values. For firms based in emerging Asian economies (other than China), we find a significant positive relation between the proportion of foreign sales and change in value. However, this relation is absent in the other three regions. This suggests that firms from emerging Asian economies are positioned to benefit from restructuring of global supply chains, especially if they have prior experience of international sales, as they may serve as supply chain alternatives to Chinese firms. The results are robust to endogeneity concerns and they cannot be explained by standard determinants of equity returns, or by industry and region fixed effects. Our results provide early evidence on expectations regarding long-term impact of the pandemic on different industries and regions. These findings can inform strategic decision making by managers such as those relating to supply chain risk, geographical diversification, and mergers & acquisitions. As immediate actions, managers would need to evaluate the concentration of their supply chains and consider derisking them. However, perhaps more significant from a managerial perspective are the insights for internationalization strategy. Our findings suggest that geographical diversification of sales is less risky than geographical diversification of assets. Thus, at least initially, firms which choose to internationalize may want to do so with regard to their sales and marketing establishments than asset-intensive manufacturing facilities. Firms could even consider relying on contract manufacturing facilities and letting these contractors manage such supply chain risks. The results of our study are of relevance to policymakers also. Policymakers can align decisions to benefit from reconfiguration of global supply chains. As businesses diversify their supplier bases, emerging Asian countries can focus policy initiatives on making their exporters more competitive, so as to benefit from the emerging opportunities. At the same time, they could also encourage critical domestic industries to either source locally or use a diversified pool of suppliers to mitigate risks of future supply chain disruptions. For instance, the pandemic highlighted the concentration risks of global pharmaceutical supply chains. A case in point is that India, which is the largest supplier of generic medicines and vaccines in the world, depends on China for 80% of its active pharmaceutical ingredients (Yap, 2020) . Countries can look at enacting policies to encourage domestic pharmaceutical manufacturers, which could not only cater to reallocated demand as global pharmaceutical sourcing diversifies, but also mitigate the risk of domestic shortage of critical medicines in the event of a future disruption. Finally, our results could also be of value for business valuation, for example to augment models used to value businesses with expectations regarding the long-term impact of the pandemic on the industry's prospects. Corporate debt maturity and future firm performance volatility Will Covid-19 have a lasting impact on globalization? DHL global connectedness index-2019 update: Mapping the current state of global flows Opening editorial: Contemporary business risks: An overview and new research agenda Backshoring strategy and the adoption of Industry 4.0: Evidence from Europe Firm internationalization and corporate social responsibility The future of global value chains The global crisis and equity market contagion Diversification's effect on firm value Deglobalisation post COVID-19 could spell trouble for the European Monetary Union Detecting abnormal changes in credit default swap spreads using matching-portfolio models Political rights and equity pricing Family control and the implied cost of equity: Evidence before and after the asian financial crisis The impact of reshoring decisions on shareholder wealth Corporate social responsibility, investor protection, and cost of equity: A crosscountry comparison The contribution of internalisation theory to international business: New realities and unanswered questions The governance of the multinational enterprise: Insights from internalization theory International HRM insights for navigating the COVID-19 pandemic: Implications for future research and practice Management forecasts and the cost of equity capital: international evidence Organizational adaptation in an economic shock: The role of growth reconfiguration Is reshoring better than offshoring? The effect of offshore supply dependence The impact of the global financial crisis on banking globalization Equity premia as low as three percent? Evidence from analysts' earnings forecasts for domestic and international stock markets OM forum-Benchmarking global production sourcing decisions: Where and why firms offshore and reshore Designing the right global supply chain network. Manufacturing & Service Operations Management Corporate focus and stock returns Bringing it all back home? Backshoring of manufacturing activities and the adoption of Industry 4.0 technologies Learning from history: Volatility and financial crises The global recession and the shift to re-shoring: Myth or reality Global diversification, industrial diversification, and firm value Japan helps 87 companies to break from China after pandemic exposed overreliance. The Washington Post PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital Has Covid-19 killed globalisation? The Economist Does corporate social responsibility affect the cost of capital Cross-country evidence on the importance of Big Four auditors to equity pricing: The mediating role of legal institutions. Accounting The virus that shut down the world. The Washington Post Retail landlords offer pandemic clauses in new leases Institutions, resources, and internationalization of emerging economy firms Toward an implied cost of capital WHO director-general's opening remarks at the media briefing on COVID-19-11 Semiglobalization and international business strategy Regime switches in the risk-return trade-off Inferring the cost of capital using the Ohlson-Juettner model Conglomerates and industry distress The KOF Globalisation Index-revisited. The Review of International Organizations Have we reached peak globalization-and where do we International differences in the cost of equity capital: Do legal institutions and securities regulation matter The effect of supply chain glitches on shareholder wealth An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm International strategy: From local to global and beyond Financial constraints and investment efficiency: Internal capital allocation across the business cycle World economic outlook: Global manufacturing downturn, rising trade barriers Understanding offshoring: A research framework based on disintegration, location and externalization advantages Corporate international diversification and risk. International Review of Financial Analysis Does diversification create value in the presence of external financing constraints? Evidence from the 2007-2009 financial crisis Tobin's Q, corporate diversification, and firm performance MNC strategies, exogenous shocks, and performance outcomes A hybrid FCM-AHP approach to predict impacts of offshore outsourcing location decisions on supply chain resilience Mitigate, tolerate or relocate? Offshoring challenges, strategic imperatives and resource constraints Global Supply Chain Risk Management RIMS: A new approach to measuring firm internationalization Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs Expected EPS and EPS growth as determinants of value COVID-19 and the Oil Price -Stock Market Nexus: Evidence From Net Oil-Importing Countries Office markets under pressure as coronavirus squeezes cities Understanding dynamics of strategic decision making in venture creation: A process study of effectuation and causation The intentions with which the road is paved: Attitudes to liberalism as determinants of greenwashing Conglomerates on the rise again? A cross-regional study on the impact of the 2008-2009 financial crisis on the diversification discount The internationalizationperformance relationship at Swiss firms: A test of the S-shape and extreme degrees of internationalization Internationalization and firm governance: The roles of CEO compensation, top team composition, and board structure Managing COVID-19: How the pandemic disrupts global value chains COVID-19 could spur automation and reverse globalisation-To some extent Covid-19's impact on supply chain decisions: Strategic insights from NASDAQ 100 firms using Twitter data Global supply chains in a post-pandemic world What COVID-19 Means for Digital Infrastructure in Emerging Markets. Emerging Markets Compass Note 83 Measuring the degree of internationalization of a firm Global competitive conditions driving the manufacturing location decision Deglobalization 2.0: Trade and openness during the great depression and the great recession Will the COVID-19 pandemic really change the governance of global value chains? Corporate diversification and firm value during economic downturns How does COVID-19 affect china's insurance market? Emerging Markets Finance and Trade Pandemic is last nail in globalization's coffin, says carmen reinhart. Bloomberg Strategic responses to crisis De-globalization: Theories, predictions, and opportunities for international business research Trade falls steeply in first half of 2020 Dynamic capabilities as a mediator linking international diversification and innovation performance of firms in an emerging economy Pandemic lays bare U.S. reliance on china for drugs. The Wall Street Journal Additional supporting information may be found online in the Supporting Information section at the end of this article.