Bus Val

J. of Multi. Fin. Manag. 21 (2011) 55–67

Contents lists available at ScienceDirect

Journal of Multinational Financial
Management
journal homepage: www.elsevier.com/locate/econbase

Factors in multinational valuations: Transparency, political risk and diversification
NyoNyo A. Kyaw ∗, John Manley, Anand Shetty
Department of Finance, Business Economics and Legal Studies, Hagan School of Business, Iona College, New Rochelle,
NY 10801, United States

article

info

Article history:
Received 5 August 2010
Accepted 14 December 2010
Available online 21 December 2010
JEL classification:
F37, G30
Keywords:
Multinationals
Valuation
Transparency
Geographic diversification
Political risk

abstract
This paper examines the role of geographic diversification, transparency, and political risk, in the determination of the value of multinational corporations (MNCs). Using alternative measures for geographic diversification, this paper finds the evidence supporting the positive effect of the degree of multinationality on the firm value. The evidence also provides support for the theories that argue that political risk and transparency have negative impact on the
MNC value.
Published by Elsevier B.V.

1. Introduction
The factors impacting the performance of multinational firms remain of much interest to managers, investors and researchers. A number of theories have been put forth and tested empirically to link the international expansion with the firm value. The internalization theory (INT) posits the idea that multinational firms can create value by internalizing the markets for key intangible assets of the firm such as marketing, managerial and production skills, patents and goodwill. For example, Malone and Rose (2006) argue that a firm’s unique intangible assets provide a competitive advantage that may be best claimed through geographic expansion. Using transaction cost theory, they argue that man-

∗ Corresponding author at: Department of

References: Alesina, A., Perotti, R., 1996. Income distribution, political instability, and investment. European Economic Review 40, 1203–1228. Allen, L., Pantzalis, C., 1996. Valuation of operating flexibility of multinational corporations. Journal of International Business Studies 27 (4), 633–653. Almazan, A., Javier, S., Sheridan, T., 2003. Stakeholders, transparency and capital structure. Working Paper 10101, National Bureau of Economic Research, November. Bennet, P.D., Green, R., 1972. Political instability as a determinant of direct foreign marketing investment. Journal of Marketing Research 9, 182–186. Bilson, C.M., Brailsford, T.J., Hooper, V.C., 2002. The explanatory power of political risk in emerging markets. International Review of Financial Analysis 11 (1), 1–27. Birkinshaw, J., Ridderstrale, J., 1999. Fighting the corporate immune system: a process study of subsidiary initiatives in multinational corporations. International Business Review 8 (2), 149–180. Bodnar, G., Tang, C., Weintrop, J., 2003. The Value of Corporate International Diversification. Working Paper, John Hopkins University. Buckley, P.J., Casson, M., 1998. Models of the multinational enterprise. Journal of International Business Studies 29 (1), 21–44. Campos, N.F., Nugent, J.B., 2002. Who is afraid of political instability. Journal of Development Economics 67, 157–172. Campos, N.F., Nugent, J.B., 2003. Aggregate investment and political instability: an econometric investigation. Economica 70, 533–549. Click, R., Harrison, P., 2000. Does multinationality matter? Evidence of Value Destruction in U.S. Multinational Corporations, Working Paper 21, US Federal Reserve Board. Contractor, F., Kundu, S., Hsu, C.c., 2003. A three-stage theory of international expansion: the link between multinationality and performance in the service sector Coase, R.H., 1937. The nature of the firm. Economica 4, 386–405. Carmignani, F., 2003. Political instability, uncertainty, and economics. Journal of Economic Surveys 17, 1–54. Chang, S.C., Huang, P.C., 2002. Corporate multinationalism, organizational learning, and market reaction to international joint ventures: evidence from Taiwan Cho, H.J., 2003. Political Risk, Labor Standards, and Foreign Direct Investment, www document http://www.anderson.ucla. Denis, D.J., Denis, D.K., Yost, K., 2002. Global diversification, industrial diversification, and firm value. Journal of Finance 57 (5), 1951–1979. Diamonte, R.L., Liew, J.M., Stevens, R.L., 1996. Political risk in emerging and developed markets. Financial Analysis Journal 52 (3), 71–76. N.A. Kyaw et al. / J. of Multi. Fin. Manag. 21 (2011) 55–67 67 Doukas, J., 1995. Overinvestment, Tobin’s q and gains from foreign acquisitions. Journal of Banking and Finance 19, 1285–1303. Doukas, J., Pantzalis, C., Kim, S., 1999. Intangible assets and the network structure of MNCs. Journal of International Financial Management and Accounting 10 (1), 1–23. Doukas, J., Travlos, N.G., 1988. The effect of corporate multinationalism on shareholders’ wealth: evidence from international acquisitions Dunning, J.H., 1980. Toward an electic theory of international production: some empirical tests. Journal of International Business Studies 11, 9–31. Dunning, J.H., 1998. Location and the multinational enterprise: a neglected factor? Journal of International Business Studies 20 (1), 45–66. Easterbrook, F., 1984. Two agency-cost explanations of dividends. American Economic Review 74, 650–659. Erb, C.B., Harvey, C.R., Viskanta, T.E., 1996. Political risk, economic risk, and financial risk. Financial Analysts Journal 52 (6), 29–46. Fielding, D., 2003. Modeling political instability and economic performance: Israeli investment during the intifada. Economica 70, 159–186. Freund, S., Trahan, E., Vasudevan, G., 2007. The effects of global and industrial diversification on firm value and operating performance Geringer, M.J., Beamish, P.W., da Costa, R.C., 1989. Diversification strategy and internationalization: implications for MNE performance Globerman, S., Shapiro, D., 2003. Governance infrastructure and US foreign direct investment. Journal of International Business Studies 34, 19–39. Gomes, L., Ramaswamy, K., 1999. An empirical examination of the form of relationship between multinationality and performance. Journal of International Business Studies 30 (1), 173–188. Hennart, J.-F., 2007. The theoretical rationale for a multinationality-performance relationship. Management International Review 47 (3), 423–452. Howell, L.D., 2001. The Handbook of Country and Political Risk Analysis, 3rd ed. The PRS Group, East Syracuse, NY. Kim, W.S., Lyn, E.O., 1986. Excess market value, the multinational corporation, and Tobin’s q ratio. Journal of International Business Studies 17, 119–125. Kogut, B., Zander, Udo, 1993. Knowledge of the firm and the evolutionary theory of multinational corporation. Journal of International Business Studies 24 (4), 625–645. Lu, J., Beamish, P., 2004. International diversification and firm performance: the S-curve hypothesis. Academy of Management Journal 47 (4), 598–6009. Malone, C., Rose, L., 2006. Intangible assets and firm diversification. International Journal of Managerial Finance 2, 136. Mishra, Chandra S., Gobeli, David H., 1998. Managerial incentives, internationalization, and market valuation of multinational firms Morck, Randall, Yeung, Bernard, 1991. Why investors value multinationality. The Journal of Business 64 (2), 165–187. Morck, Randall, Yeung, Bernard, 1992. Internationalization: an event study test. Journal of International Economics 33, 41–56. Myers, Stuart, 1977. Determinants of corporate borrowing. Journal of Financial Economics 5, 146–175. Myers, S., Majluf, N., 1984. Corporate financing and investment decisions when firms have information that investors do not have Pak, Y.S., Park, Y.R., 2004. Global ownership strategy of Japanese multinational enterprises: a test of internalization theory. Pantzalis, C., 2001. Does location matter? An empirical analysis of geographic scope and MNC market valuation. Journal of International Business Studies 32 (1), 133–155. Piscitello, L., Rabbiosi, L., 2005. Knowledge transfer from foreign subsidiaries to parent companies: mechanisms and effects on competitive advantage Petersen, M., 2009. Estimating standard errors in finance panel data sets: comparing approaches. Review of Financial Studies 22 (1), 435–480. Rugman, A.W., 1981. Inside the Multinationals: The Economics of Internal Markets. Columbia University Press, New York. Ruigrok, W., Wagner, H., 2003. Internalization and performance: an organizational learning perspective. Management International Review 43 (1), 63–83. Subrahmanyan, A., Titman, S., 1999. The going public decision and the development of financial markets. Journal of Finance 54, 1045–1082. Tallman, S., Li, J., 1996. Effects of international diversity and product diversity on the performance of multinational firms. Tang, C., Tikoo, S., 1999. Operational flexibility and market valuation of earnings. Strategic Management Journal 20 (8), 749–761. Thompson, S., 2006. Simple Formulas for Standard Errors that cluster by Both Firm and Time, Harvard Working Paper. Vermeulen, f., Barkema, H., 2002. Pace, rhythm, and scope: process dependence in building a profitable multinational corporation. Strategic Management Journal 23 (7), 637–654. Wolf, B.M., 1977. Industrial diversification and internationalisation: some empirical evidence. Journal of Industrial Economics 26, 177–191.