Intangible Assets and Firm Diversification

28 Pages Posted: 18 Dec 2005  

Christopher B. Malone

School of Economics and Finance, Massey University

Lawrence C. Rose

Massey University

Date Written: December 19, 2005

Abstract

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.

Keywords: Intangible Assets, Transactions costs, Internalisation, Mergers and Acquisitions, FDI

JEL Classification: F23, G15, G34

Suggested Citation

Malone, Christopher B. and Rose, Lawrence C., Intangible Assets and Firm Diversification (December 19, 2005). Available at SSRN: https://ssrn.com/abstract=870897 or http://dx.doi.org/10.2139/ssrn.870897

Christopher B. Malone (Contact Author)

School of Economics and Finance, Massey University ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Lawrence (Larry) Craig Rose

Massey University ( email )

Private Bag 102-904
North Shore Mail Centre
Auckland, 0745
New Zealand
+64 9 4140800, ex 9558 (Phone)
+64 9 441 8150 (Fax)

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