International Corporate Diversification, Market Valuation, and Size‐Adjusted Evidence

International Corporate Diversification, Market Valuation, and Size‐Adjusted Evidence International Corporate Diversification, Market Valuation, and Size-Adjusted Evidence VIHANG R. ERRUNZA AND LEMMA W. SENBET* I. Introduction Errunza and Senbet [ES, 7 analyze the effects of international .operations on 1 the market value of the firm both at theoretical and empirical levels. The theoretical model, which is largely heuristic, exploits the costly supply adjustment of multinational firms (MNCs) in providing international portfolio diversification services to investors who face differential cost barriers to direct holdings of assets across national boundaries. MNCs compete as financial intermediaries to undo the barriers so that, in equilibrium, profits are driven out; MNCs and pure domestic firms sell at an equivalent risk-adjusted return. However, costly financial intermediation and the associated relative efficiency leads to a positive valuation effect for MNCs relative to purely domestic firms. Further, the equilibrium analysis implies that demand-side (investor) barriers to international capital flows alone are inconsequential to the valuation of MNCs in their pure financial role, but that the interaction with the supply-side costs are necessary to produce a valuation effect at the corporate level. ES subject the theory to an empirical analysis in a value-based approach by employing a variant of Tobin’s [17]qratio. The analysis, controlling for industrial http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

International Corporate Diversification, Market Valuation, and Size‐Adjusted Evidence

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Publisher
Wiley
Copyright
1984 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1984.tb03663.x
Publisher site
See Article on Publisher Site

Abstract

International Corporate Diversification, Market Valuation, and Size-Adjusted Evidence VIHANG R. ERRUNZA AND LEMMA W. SENBET* I. Introduction Errunza and Senbet [ES, 7 analyze the effects of international .operations on 1 the market value of the firm both at theoretical and empirical levels. The theoretical model, which is largely heuristic, exploits the costly supply adjustment of multinational firms (MNCs) in providing international portfolio diversification services to investors who face differential cost barriers to direct holdings of assets across national boundaries. MNCs compete as financial intermediaries to undo the barriers so that, in equilibrium, profits are driven out; MNCs and pure domestic firms sell at an equivalent risk-adjusted return. However, costly financial intermediation and the associated relative efficiency leads to a positive valuation effect for MNCs relative to purely domestic firms. Further, the equilibrium analysis implies that demand-side (investor) barriers to international capital flows alone are inconsequential to the valuation of MNCs in their pure financial role, but that the interaction with the supply-side costs are necessary to produce a valuation effect at the corporate level. ES subject the theory to an empirical analysis in a value-based approach by employing a variant of Tobin’s [17]qratio. The analysis, controlling for industrial

Journal

The Journal of FinanceWiley

Published: Jul 1, 1984

References

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