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The effect of foreign segment location on the geographical diversification discount
journal contribution
posted on 2023-06-08, 11:51 authored by Surendranath R Jory, Thanh N NgoWe 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.
History
Publication status
- Published
Journal
Global Finance JournalISSN
1044-0283Publisher
ElsevierExternal DOI
Issue
2Volume
23Page range
108-124Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2012-08-17Usage metrics
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