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Should you globally diversify or let the globally diversified firm do it for you?

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  • Farooqi, Javeria
  • Huerta, Daniel
  • Ngo, Thanh

Abstract

This paper examines whether investor-made international diversification outperforms corporate international diversification. Our results indicate that internationally diversified firms yield higher returns relative to investor-made internationally diversified portfolios. Our results partially offer an explanation for the ‘home bias puzzle’, which argues that international asset holdings in individual portfolios remain significantly lower than forecasted by analysts despite the integration of global capital markets. However, as firms increase the number of geographic segments, the excess returns are lower. Additionally, firms that belong to durables, energy, manufacturing, shops and telecommunication industries have higher excess returns relative to other industries. Overall, our results suggest that investors will earn higher returns by investing in globally diversified MNCs rather than by attempting to build mimicking internationally diversified portfolios.

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  • Farooqi, Javeria & Huerta, Daniel & Ngo, Thanh, 2015. "Should you globally diversify or let the globally diversified firm do it for you?," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 75-85.
    • Handle: RePEc:eee:quaeco:v:57:y:2015:i:c:p:75-85
    DOI: 10.1016/j.qref.2015.02.005
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    2. S. Veeramani & Abha Shukla & Mariam Jamaleh, 2020. "Financial theories of foreign direct investment: a review of literature," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 185-217, June.
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    More about this item

    Keywords

    International portfolio returns; Diversification; International diversification; MNCs;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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