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The effect of foreign segment location on the geographical diversification discount

The effect of foreign segment location on the geographical diversification discount
The effect of foreign segment location on the geographical diversification discount
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
108-124
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh N.
54ed0c1a-89c8-4cc0-a5fe-8a4b91490265
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh N.
54ed0c1a-89c8-4cc0-a5fe-8a4b91490265

Jory, Surendranath and Ngo, Thanh N. (2012) The effect of foreign segment location on the geographical diversification discount. Global Finance Journal, 23 (2), 108-124. (doi:10.1016/j.gfj.2012.06.001).

Record type: Article

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

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Published date: 12 June 2012
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 394274
URI: http://eprints.soton.ac.uk/id/eprint/394274
PURE UUID: d2120d39-6cd9-4eb8-92b6-9dfd48c03d25
ORCID for Surendranath Jory: ORCID iD orcid.org/0000-0002-8265-0001

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Date deposited: 12 May 2016 13:30
Last modified: 21 Aug 2019 00:32

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Author: Thanh N. Ngo

University divisions

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