The Valuation Effects of Multinational Firms
60 Pages Posted: 27 Mar 2008 Last revised: 14 Mar 2012
Date Written: January 10, 2008
Using a unique sample of 212 UK multinational firms and 4,676 subsidiaries, I show that multinational firms attract, on average, a global diversification premium of approximately 16% compared with a country-industry matched portfolio of local non-multinational firms. I also show that the value premium is higher when the difference between UK and host country internal corporate governance is greater - on average better corporate governance practices explain roughly one-third of the value premium. This result suggests that multinational firms are compensated for exporting good corporate governance. Further, I find evidence that advocates multinational firms invest more in countries with weaker governance standards. At the subsidiary level, I find that multinational firms use internal capital markets to channel higher levels of investment into better investment opportunities. Finally, consistent with a value premium, I show that multinational firms channel investment into globally cheap assets.
Keywords: Multinational, Governance, International, Valuation, Diversification
JEL Classification: G30, G31, G32, G34
Suggested Citation: Suggested Citation