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The Effect of Corporate International Diversification on Firm Risk

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  • Charee Kwak

    (Graduate School of Business Administration, Kobe University)

Abstract

This study investigates the relation between corporate international diversification and firm risk using a sample of listed Japanese firms. Diversification benefits obtained by operating in multiple markets which are not perfectly correlated can decrease risk, according to portfolio theory. However, additional risk factors of foreign expansion including currency risk, political risk, and greater agency costs may increase risks of multinational firms. Previous studies also report conflicting results, risk-increasing and risk-decreasing. The results of this study present that corporate international diversification increases systematic, idiosyncratic, and total risk. This indicates that shareholders consider overseas expansion of Japanese firms as risk-increasing and the cost of capital of Japanese multinationals becomes higher because of the increase in risk.

Suggested Citation

  • Charee Kwak, 2017. "The Effect of Corporate International Diversification on Firm Risk," Discussion Papers 2017-17, Kobe University, Graduate School of Business Administration.
    • Handle: RePEc:kbb:dpaper:2017-17
    as

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    File URL: https://www.b.kobe-u.ac.jp/papers_files/2017_17.pdf
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    References listed on IDEAS

    as
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