Corporate diversification, firm value and operating performance: testing the relevance of segment accounting data

This study presents direct evidence on the effect of corporate international activity on firm value and operating accounting income. We find that foreign assets are positively related to firm value and accounting operating income, even after we control for identified determinants of value and earnings. We also test whether investors differentially price foreign and domestic assets. Our results provide evidence that investors value foreign and domestic assets distinctly with foreign assets enjoying greater capitalisation relative to domestic assets. Further, our analysis indicates that investors' asset valuation depends on the operating environment of the firm. Specifically, valuation differences arise from the market's assessment of the probability of recovery of assets located in different jurisdictions. We also document that foreign assets correlate to greater levels of operating income than do domestic assets. We find no evidence that international diversification destroys firm value.