Valuation Effects of Global Diversification

Journal of International Business Studies, Vol. 40, No. 9, pp. 1515-1532

43 Pages Posted: 26 Mar 2008 Last revised: 23 Nov 2012

See all articles by Amar Gande

Amar Gande

Southern Methodist University (SMU) - Finance Department

Christoph Schenzler

Vanderbilt University - Finance

Lemma W. Senbet

University of Maryland - Robert H. Smith School of Business

Date Written: December 1, 2009

Abstract

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.

Keywords: Cross-Border Investments, Creditor Rights, Diversification Strategies, Imperfect World Capital Markets Theory, Internalization Theory, Multinational Corporations (MNCs) and Enterprises (MNEs)

Suggested Citation

Gande, Amar and Schenzler, Christoph Michael and Senbet, Lemma W., Valuation Effects of Global Diversification (December 1, 2009). Journal of International Business Studies, Vol. 40, No. 9, pp. 1515-1532, Available at SSRN: https://ssrn.com/abstract=1108098

Amar Gande (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
2147681945 (Phone)
2147684099 (Fax)

Christoph Michael Schenzler

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Lemma W. Senbet

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2242 (Phone)
301-405-0359 (Fax)

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