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Foreign asset risk exposure, DOI, and performance: An analysis of Canadian banks

Author

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  • Walid Hejazi

    (Rotman School of Management, University of Toronto, Ontario, Canada)

  • Eric Santor

    (Bank of Canada, Ottawa, Ontario, Canada)

Abstract

The international business literature measures links between the degree of internationalization (DOI) of a firm's activities and its performance. Implicit in this literature is the idea that there must be a positive relationship between DOI and performance. This paper argues that if the research design does not address the issue of causality, a positive relationship cannot necessarily be interpreted as meaning that DOI has improved performance. Furthermore, the research design should consider risk exposure. For example, if the riskiness of a firm fell as a result of a move abroad, then one can envision a negative relationship and also conclude that the move abroad paid off. Using detailed quarterly data over the period 1994–2004 on the distribution of Canadian banks' assets across countries, and broken down by risk category, the analysis simultaneously accounts for endogeneity and risk exposure. The results establish a causal relationship between DOI and performance, but find that the nature of this relationship varies by bank, and also depends upon the riskiness associated with each bank's foreign asset exposures. These causal relationships are robust to the introduction of two formal risk measures: credit ratings and share price volatility. The authors discuss policy implications of their analysis.

Suggested Citation

  • Walid Hejazi & Eric Santor, 2010. "Foreign asset risk exposure, DOI, and performance: An analysis of Canadian banks," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(5), pages 845-860, June.
  • Handle: RePEc:pal:jintbs:v:41:y:2010:i:5:p:845-860
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    Citations

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    Cited by:

    1. Biener, Christian & Eling, Martin & Jia, Ruo, 2017. "The structure of the global reinsurance market: An analysis of efficiency, scale, and scope," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 213-229.
    2. Swamy, Vighneswara, 2014. "Bank regulation, supervision and efficiency during the global financial crisis," MPRA Paper 58295, University Library of Munich, Germany.
    3. Mallon, Mark R. & Fainshmidt, Stav, 2017. "Assets of Foreignness: A Theoretical Integration and Agenda for Future Research," Journal of International Management, Elsevier, vol. 23(1), pages 43-55.
    4. Dinamona, Didelle, 2010. "Sensibilité des banques aux chocs macroéconomiques : La diversification apporte-t-elle toujours des gains? Cas des banques canadiennes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 86(1), pages 79-107, mars.

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