The effect of foreign segment location on the geographical diversification discount

Jory, Surendranath R and Ngo, Thanh N (2012) The effect of foreign segment location on the geographical diversification discount. Global Finance Journal, 23 (2). pp. 108-124. ISSN 1044-0283

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Abstract

We study how the countries in which foreign segments are located affect the value of globally-diversified firms. We use the Heritage Foundation/Wall Street Journal Index of Economic Freedom and the World Bank's Financial Development and Structure database to characterize the locations of the foreign segments. We find that U.S. globally-diversified firms with foreign segments in countries with more entrepreneurs (i.e., Business Freedom) and a better investment environment (i.e., Investment Freedom) are associated with higher excess values. Our findings suggest that globally-diversified firms can add value by carefully selecting locations for their foreign segments in countries that rate highly on key indices of economic freedom. Our analysis of the World Bank's Financial Development and Structure factors shows that investors do not value highly U.S. globally-diversified firms with foreign segments in overseas locations that share the same “financial” characteristics as their home country. We attribute that to a lack of heterogeneity between parent- and foreign segment-country characteristics, thus nullifying the diversification benefits for the parent company's shareholders.

Item Type: Article
Keywords: Geographical diversification discount; Industrial diversification; Country and regional effects; Economic freedom; Financial Development and Structure
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance > HG3810 Foreign exchange. International finance. International monetary system
Depositing User: Surendranath Jory
Date Deposited: 17 Aug 2012 12:11
Last Modified: 17 Aug 2012 12:11
URI: http://sro.sussex.ac.uk/id/eprint/39677
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