How Does Involvement in the Global Production Network Impact Valuation of Swedish Firms?

Risk and return are directly related. Modern portfolio theory states that investors holding stocks with greater exposure to systematic risk must be compensated with higher expected return and conversely, investors holding stocks with lower exposure to systematic risk must earn lower expected return. Traditional asset pricing models build on this relationship, assuming that the market, firm size and firm value are the only characteristics of systematic risk, explaining stock return. However, previous research indicates the opposite, that there are other additional risk factors explaining stock return, two of which are the production network and firm geographical spread. This suggests that the global production network (GPN) might have characterics of systematic risk, explaining stock return. Therefore, the aim of this study is to investigate whether the GPN has asset pricing implications, focusing on two risk dimensions: output link concentration and geographical dispersion. Following similar previous studies, a two-step Fama-McBeth regression approach is employed. The results show that concentration is a determinant of stock return, where investors accept lower returns for holding stocks with geographically concentrated output links in the GPN, although geographical dispersion shows no significant effect. These findings imply that while GPN structure can provide valuable insights about firm valuation, only certain aspects are embodied in the Swedish stock market. The research helps bridge asset pricing and GPN theory by identifying how firm interconnections in GPNs affect risk and return dynamics of traditional asset pricing models.