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Corporate internationalization, subsidiary locations, and the cost of equity capital

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Abstract

This study examines the relationship between corporate internationalization and the cost of equity capital. We find that international diversification reduces the cost of equity. The diversification benefits are particularly strong during the 2008 financial crisis and for financially constrained firms. We also find that market-specific factors serve as important channels through which the corporate internationalization effects amplify or attenuate. Overall, our study provides support for theories that multinational companies perform valuable diversification functions to investors in a world with segmented and imperfect financial markets.

Résumé

Cette étude examine la relation entre l'internationalisation des entreprises et le coût des fonds propres. Nous constatons que la diversification internationale réduit le coût des capitaux propres. Les avantages de la diversification sont particulièrement importants pendant la crise financière de 2008 et pour les entreprises ayant des contraintes financières. Nous constatons également que les facteurs spécifiques au marché constituent des canaux importants par lesquels les effets d’internationalisation des entreprises s’amplifient ou s’atténuent. Dans l’ensemble, notre étude appuie les théories selon lesquelles les entreprises multinationales (EMN) remplissent des fonctions de diversification intéressantes pour les investisseurs dans un monde caractérisé par des marchés financiers segmentés et imparfaits.

Resumen

Este estudio examina la relación entre la internacionalización corporativa y el costo de capital propio. Encontramos que la diversificación internacional reduce el costo de capital propio. Los beneficios de la diversificación son particularmente fuertes durante la crisis financiera del 2008 y para las empresas financieramente limitadas. Encontramos también que los factores específicos de mercado sirven como canales importantes a través de los cuales los efectos de la internacionalización corporativa se amplifican o se atenúan. En general, nuestro estudio proporciona apoyo para las teorías que las empresas multinacionales (EMN) realizan funciones valiosas de diversificación para los inversionistas en un mundo con mercados financieros segmentados e imperfectos.

Resumo

Este estudo examina a relação entre a internacionalização corporativa e o custo do capital próprio. Descobrimos que a diversificação internacional reduz o custo do capital próprio. Os benefícios da diversificação são particularmente fortes durante a crise financeira de 2008 e para empresas financeiramente limitadas. Nós também concluímos que fatores específicos do mercado servem como canais importantes através dos quais os efeitos da internacionalização corporativa amplificam-se ou atenuam-se. No geral, nosso estudo fornece suporte para teorias de que empresas multinacionais (MNCs) realizam funções de diversificação valiosas para investidores em um mundo com mercados financeiros segmentados e imperfeitos.

摘要

本研究考察了企业国际化与股权资本成本之间的关系。我们发现, 国际多元化降低股权成本。在2008年金融危机期间以及对财务紧张的公司而言, 多元化收益尤为强劲。我们还发现, 市场特定因素是企业国际化影响放大或缩小的重要渠道。总体上讲, 我们的研究为跨国公司(MNCs)在分割的和不完善的金融市场的世界中为投资者提供有价值的多元化功能提供了理论支持。

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Figure 1

Panels A and B plot equally-weighted mean and median cost of equity (CoE) splitting the sample by whether firms report foreign subsidiaries. Foreign subsidiaries are identified through Exhibit 21 in firms’ annual financial reports (10-Ks). CoE is a firm’s cost of equity capital (in excess of the yield on 10-year Treasury bonds) constructed following Ohlson and Juettner-Nauroth (2005) assuming long-term earnings growth rate of 4%

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Acknowledgements

The authors thank Azamat Abdymomunov, Ray Brastow, Filippo Curti, Jeff Gerlach, Nada Mora, Leming Lin, Leandro Sanz, Jennifer Tucker, Pinar Uysal and Mihail Velikov for valuable comments and suggestions. Jeffrey Cheng provided able research assistance. All remaining errors are those of the authors alone. The views expressed in this paper do not necessarily reflect the position of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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  1. Quantitative Supervision and Research, Federal Reserve Bank of Richmond, Charlotte, NC, USA

    Atanas Mihov

  2. Finance, Insurance, and Real Estate Department, University of Florida, Gainesville, FL, USA

    Andy Naranjo

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  1. Atanas Mihov
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Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave.com/journals).

Accepted by Lemma Senbet, Area Editor, 10 November 2018. This article has been with the authors for three revisions.

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Mihov, A., Naranjo, A. Corporate internationalization, subsidiary locations, and the cost of equity capital. J Int Bus Stud 50, 1544–1565 (2019). https://doi.org/10.1057/s41267-018-00207-3

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