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

  • Gordon M. Bodnar
  • Joseph Weintrop

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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File URL: http://www.nber.org/papers/w5904.pdf
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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
Note: IFM
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  1. Kothari, S. P. & Sloan, Richard G., 1992. "Information in prices about future earnings : Implications for earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 143-171, August.
  2. James R. Hines Jr., 1991. "Dividends and Profits: Some Unsubtle Foreign Influences," NBER Working Papers 3730, National Bureau of Economic Research, Inc.
  3. Ball, Ray & Watts, Ross, 1972. "Some Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, vol. 27(3), pages 663-81, June.
  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 C95-051, University of California at Berkeley.
  5. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, vol. 2(1), pages 3-28, March.
  6. Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 231-258, December.
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