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The Valuation of the Foreign Income of U.S. Multinational Firms: A Growth Opportunities Perspective

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  • Gordon M. Bodnar
  • Joseph Weintrop

Abstract

This paper demonstrates the value-relevance of foreign earnings for U.S. multinational firms by examining the associations between annual abnormal stock performance and changes in firms' domestic and foreign incomes disclosed through SEC Regulation 210.4-08(h). For 2570 firm-year observations between 1985 and 1993, both foreign and domestic earnings changes have significant positive associations with annual excess returns measures; however, the association coefficient on foreign income is significantly larger than the association coefficient on domestic income. This indicates that foreign earnings disclosures are value-relevant and suggests that firm value is more sensitive to foreign earnings than domestic earnings. We demonstrate that this larger foreign association coefficient is consistent with differences in growth opportunities between domestic and foreign operations. To further support the growth opportunity interpretation of the results, we demonstrate that larger foreign association coefficients are not due to the influence of exchange rate changes or the result of methodological problems such as differences in the timing of foreign versus domestic earnings recognition or misspecification in the earnings expectation process.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5904.

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Date of creation: Jan 1997
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Publication status: published as Bodnar, Gordon M. & Weintrop, Joseph, 1997. "The valuation of the foreign income of US multinational firms: a growth opportunities perspective," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 69-97, December.
Handle: RePEc:nbr:nberwo:5904

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  1. Hines Jr., J.R., 1991. "Dividends And Profits: Some Unsubtle Foreign Influences," Papers, Princeton, Woodrow Wilson School - John M. Olin Program 77, Princeton, Woodrow Wilson School - John M. Olin Program.
  2. Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 9(3), pages 231-258, December.
  3. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 2(1), pages 3-28, March.
  4. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Survey of Empirical Research on Nominal Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-051, University of California at Berkeley.
  5. Kothari, S. P. & Sloan, Richard G., 1992. "Information in prices about future earnings : Implications for earnings response coefficients," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 15(2-3), pages 143-171, August.
  6. Ball, Ray & Watts, Ross, 1972. "Some Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, American Finance Association, vol. 27(3), pages 663-81, June.
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Cited by:
  1. Chiang, Yi-Chein & Ko, Chun-Lein, 2009. "An empirical study of equity agency costs and internationalization: Evidence from Taiwanese firms," Research in International Business and Finance, Elsevier, Elsevier, vol. 23(3), pages 369-382, September.
  2. Steve Lim, 2014. "The information content of disaggregated accounting profitability: operating activities versus financing activities," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 43(1), pages 75-96, July.
  3. Dominguez, Kathryn M.E. & Tesar, Linda L., 2006. "Exchange rate exposure," Journal of International Economics, Elsevier, Elsevier, vol. 68(1), pages 188-218, January.
  4. Bodnar, G.M. & Tang, C. & Weintrop, J., 1998. "Both Sides of Corporate Diversification: The Value Impacts of Geographic and Industrial Diversification," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 98-02, Wharton School - Weiss Center for International Financial Research.
  5. Robert Freeman & Adam Koch & Haidan Li, 2011. "Can historical returns-earnings relations predict price responses to earnings news?," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 37(1), pages 35-62, July.
  6. Doukas, John A. & Pantzalis, Christos, 2003. "Geographic diversification and agency costs of debt of multinational firms," Journal of Corporate Finance, Elsevier, Elsevier, vol. 9(1), pages 59-92, January.

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