Valuation Effects of Global Diversification
Southern Methodist University
Vanderbilt University - Finance
Lemma W. Senbet
University of Maryland - Robert H. Smith School of Business
December 1, 2009
Journal of International Business Studies, Vol. 40, No. 9, pp. 1515-1532
This paper examines the effect of global diversification on firm value using a dataset of U.S. firms from 1994-2002. We document that global diversification enhances firm value. Specifically, we find Tobin's q, our proxy for firm value increases with foreign sales (measured as a fraction of the firm's total sales) even after we control for well-known determinants of firm value. In contrast, we find no such evidence for industrial diversification. We find evidence of both financial and real effects driving such a value enhancement from global diversification. Furthermore, we find that the valuation benefits from global diversification are higher if the firm diversifies into countries with creditor rights that are stronger than that of the United States. Our results are also robust to controlling for the firm's endogenous choice to diversify across countries or across industries. Our study is anchored by the theories of both the financial and real dimensions of global diversification, and our results support both theories. Overall, our results provide a unifying view that global diversification benefits are driven by both the real and financial dimensions.
Number of Pages in PDF File: 43
Keywords: Cross-Border Investments, Creditor Rights, Diversification Strategies, Imperfect World Capital Markets Theory, Internalization Theory, Multinational Corporations (MNCs) and Enterprises (MNEs)Accepted Paper Series
Date posted: March 26, 2008 ; Last revised: November 23, 2012
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