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States Of The Economy And Geographic Investment Decisions

Author

Listed:
  • C. Catherine Chiang
  • Yilun Shi

Abstract

We examine the impact of economic conditions on firm performance after geographic expansions and divestures. We conjecture that different economy conditions during which a firm expands in and out of geographic territories affect the firm’s ability to transform its resources into competitive edges. The difference in the ability of a firm to convert resources to advantages, in turn, leads to variations in operating performance subsequent to geographic expansions and divestures. We conduct empirical tests of our hypotheses using corporation self-disclosed segment data from 1979 to 2008 from COMPUSTAT. We find that, during weak economic cycles, geographic expansions result in sustained long-term profitability. Specifically, firms’ geographic expansion decisions contribute 5.4% and 3.9% per year to industry-adjusted annual return on assets (ROA) over 4- and 5-year periods, respectively. On the other hand, geographic divestures enacted during a weak economy do not help improve firm performance. Moreover, both strong and weak economic conditions enhance performance of geographic expansion over two years but have no long-term effects. Finally, the state of the economy during which time geographic divesture takes place does not affect subsequent operating performance.

Suggested Citation

  • C. Catherine Chiang & Yilun Shi, 2016. "States Of The Economy And Geographic Investment Decisions," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 10(1), pages 39-52.
  • Handle: RePEc:ibf:ijbfre:v:10:y:2016:i:1:p:39-52
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    More about this item

    Keywords

    Geographic Diversification and Divesture; Operating Performance; Resource-Based View;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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