Investment Performance of U.S.-Based Multinational Companies: Comments and a Perspective on International Diversification of Real Assets

Abstract:     
The major objective of this paper is to provide a short review of the literature regarding investor evaluation of foreign operations of U.S.-based multinational companies. While U.S.-based multinational companies continue to expand overseas, this paper addresses the question: Do investor-owners recognize the advantages of international diversification of real assets provided by their investment in the shares of a multinational company as opposed to international portfolio diversification directly by these investors? This paper concludes that there seems to be a substantial body of evidence to indicate that an increasing proportion of internationality is associated with decreasing dependence on the domestic capital markets, decreasing systematic risk, and an increasing price/earnings ratio. Thus, U.S. investors are found to like and reward international operations of U.S. companies possibly because of the advantages of international diversification of real assets, the higher profitability and growth rates of foreign operations, or some other advantages enjoyed by multinational companies. These results imply that the risk-return characteristics of each foreign investment be used to determine an appropriate hurdle rate which may even be lower than the hurdle rate of a comparable domestic project.

Number of Pages in PDF File: 7

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