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Does multinationality matter? Evidence of value destruction in U.S. multinational corporations

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  • Reid W. Click
  • Paul Harrison

Abstract

We document that capital markets penalize corporate multinationality by putting a lower value on the equity of multinational corporations than on otherwise similar domestic corporations. Using Tobin's q, the multinational discount is estimated to be in the range of 8.6% to 17.1%. The most important mechanism of value destruction is an asset channel in which multinationals have disproportionately high levels of assets in relation to the earnings they generate. Foreign assets are particularly associated with value destruction. In contrast, exporting from U.S. operations is associated with an export premium -- of approximately 3.9% -- resulting from both a higher market value and a lower asset size. Given these findings, we ask why firms become multinationals. Evidence reveals that the portion of a firm owned by management is inversely related to the likelihood that the firm is a multinational, so we conclude that managers who do not own much of the firm may be building multinational empires for private gains at the expense of the shareholders.

Suggested Citation

  • Reid W. Click & Paul Harrison, 2000. "Does multinationality matter? Evidence of value destruction in U.S. multinational corporations," Finance and Economics Discussion Series 2000-21, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2000-21
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    References listed on IDEAS

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    Cited by:

    1. Gao, Wenlian & Chou, Julia, 2015. "Innovation efficiency, global diversification, and firm value," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 278-298.
    2. Buigues, Pierre-André & Lacoste, Denis & Lavigne, Stéphanie, 2015. "When over internationalized companies reduce their international footprint," International Business Review, Elsevier, vol. 24(6), pages 1039-1047.
    3. Pablo, Eduardo, 2013. "Cross-border diversification through M&As in Latin America," Journal of Business Research, Elsevier, vol. 66(3), pages 425-430.
    4. de Jong, Gjalt & van Houten, Jerry, 2014. "The impact of MNE cultural diversity on the internationalization-performance relationship," International Business Review, Elsevier, vol. 23(1), pages 313-326.
    5. Laeven, Luc, 2001. "International evidence on the value of product and geographic diversity," Policy Research Working Paper Series 2729, The World Bank.
    6. Jory, Surendranath R. & Ngo, Thanh N., 2012. "The effect of foreign segment location on the geographical diversification discount," Global Finance Journal, Elsevier, vol. 23(2), pages 108-124.

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