Intangible Assets and Firm Diversification
Christopher B. Malone
School of Economics and Finance, Massey University
Lawrence C. Rose
December 19, 2005
The purpose of the paper is to re-examine internalisation and transaction cost theories of firm FDI. The methodology is based on cross sectional multivariate regressions and the Fama-French (1998) three factor event study procedure. In addition to the key explanatory variables we introduce and model several important control variables. We find evidence consistent with the internalisation and transaction cost hypotheses. Firms classified with internalisation advantages earn event period abnormal returns of 6.84 percent above firms that are classified without such advantages. In support of transaction cost theory we find that FDIs generate an average abnormal event period return of -2.36 percent. Further, in line with transaction cost theory we find firms classified with intangible asset advantages also tend to engage in the more complex forms of foreign and industrial diversification. A limitation of the study is we have not determined if the effect linked to the possession of intangible asset advantages is temporary or permanent. The study provides new and strengthened support for internalization theory and transactions cost theory.
Number of Pages in PDF File: 28
Keywords: Intangible Assets, Transactions costs, Internalisation, Mergers and Acquisitions, FDI
JEL Classification: F23, G15, G34
Date posted: December 18, 2005
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