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Value Relevance of Multinationality: Evidencefrom Korean Firms
Sangno LeeCollege of Business Administration, Chonbuk National University, Jeonju, 561756, Koreae-mail: [email protected]
Minho KimCollege of Business Administration, Chonbuk National University, Jeonju, 561756, Koreae-mail: [email protected]
Wallace N. Davidson III Department of Finance, College of Business, Southern Illinois University, Carbondale, IL,60333e-mail: [email protected]
Abstract
The purpose of this study is to examine the valuation effects of multinationality in
Korean firms and to identify the role of multinationality in internalization theory. We
hypothesize that the market positively values the multinational activities of Korean
firms, which are operating in a small open economy in which firms have strong motiva-tions for internationalization. We use Ohlson’s (1995, Contemporary Accounting
Research, 11, 661) value model and document the positive effect for multinational firms
compared to domestic firms, as well as the positive effect of multinationality on firm
value. These results are robust across studies, as indicated by Tobin’s q measure, aswell as across years. We also hypothesize that multinationality mediates or moderates
the relationship between intangibility and firm value that is proposed in internalization
theory. We do not find supporting evidence for a mediated influence of intangibility
through multinationality on firm value nor for a moderated influence of intangibility
on firm value. We find that multinationality and intangibility directly and indepen-
dently influence firm value, without any interference from each other. These results are
also robust across studies, as indicated by Tobin’s q measure. Finally, we find that mul-
tinationality in Korean firms has never lost its importance, even during the global
financial crisis in the year 2008.
1. Introduction
When considering entering overseas markets, corporate managers must
determine whether overseas expansion is likely to result in higher
performance and ultimately in higher firm value. Academically,this question has long been studied among scholars with somewhat
We wish to acknowledge the helpful comments from our two anonymous reviewers.
Journal of International Financial Management & Accounting 26:2 2015
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contradictory results. Some studies have reported a positive relationship
between multinationality and firm value (Errunza and Senbet, 1981;
Morck and Yeung, 1991; Doukas, 1995; Bodnar et al., 1997; Gande
et al., 2009; Eckert et al., 2010), whereas others have reported thatinternational expansion tends to reduce firm values (Defusco et al.,
1988; Click and Harrison, 2000; Denis et al., 2002; Kim and Mathur,
2008; Ferris et al., 2010). Previous studies have reported inconsistent
results depending on the theories on which they are based, the measure-
ment methods for multinationality, and the countries studied.
The purpose of this paper is to provide further evidence on this
issue by addressing it in the Korean context, revisiting internalization
theory, and incorporating a longitudinal analysis with a composite
index of multinationality. First, we focus on the role of multinationali-
ty in Korea which experienced a financial crisis in 1997 – 1998 and a
global crisis in 2008 and which is sandwiched between two strong
economies, China and Japan. In the process of reforming its economy
after the two crises, Korea has established export-oriented policies,
overseas manufacturing, and foreign direct investment, which are activ-
ities of multinationality. Operating under a small economy, Korea is
required to reach a certain level of economy of scale through overseas
expansion because the home markets do not provide sufficient groundsfor survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,
2003). Thus, firms have to overcome the liabilities of foreignness and
maintain dynamic capabilities, which are defined as “the firm’s ability
to integrate, build and reconfigure its unique resources to create new
competitive advantages” (Maitland and Nicholas, 2002, p. 7). Given
that the ongoing financial and economic crises have not been
addressed with respect to multinationality during the last few years
(Oesterle and Wolf, 2011) and most extant empirical studies on thistopic have centered on U.S. multinationals (Eckert et al., 2010), a mul-
tinationality study in the Korean context that considers the experi-
enced crises can provide business practitioners with practical insight
regarding the ability of multinationality to be a driver to escape an
economic crisis.
Second, we consider an emerging issue about internalization theory
as it explains the boundaries of organizations (Buckley and Casson,
1976). Internalization theory predicts that firms take on multinational
operations only if the hierarchical model of the organization is efficient
compared to the price systems or markets. Firms will organize domes-
tic or foreign subsidiaries whenever markets operate resources less
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efficiently, such as raw materials, marketing services, and intangible
assets. Thus, internalization theory explains that multinational firms
are organized to bypass inefficient resource markets. Despite the
robustness of the theory, an endogeneity issue of multinationality hasbeen brought up recently (Hennart, 2007; Dastidar, 2009). Dastidar
(2009) argues that firm performance is not a consequence of interna-
tional diversification per se, but is affected by better performing firms
abroad. For example, firms that have highly differentiated products or
intangible assets may choose to go abroad to expand their market and
exploit comparative advantages. Reviewing 40 years of research on
internationalization and firm performance, Glaum and Oesterle (2007)
similarly point out that benefits from internalization simply accrue
from increased sizes of firms, rather than accruing directly from multi-
national diversity; multinationality is a means to expand the size of a
firm. In this study, we examine the role of multinationality to deter-
mine whether it is a determinant, a mediator, or a moderator of intan-
gible assets and performance using structural equation modeling.
Third, we incorporate a longitudinal analysis with a composite
index of multinationality in a valuation model. To estimate the value
of multinationality, we employ Ohlson’s (1995) valuation model, the
validity of which has been successfully demonstrated in many account-ing and finance empirical studies (Collins et al., 1998; Francis et al.,
2000; among others). The model expresses the value of the firm as a
function of net assets, accounting profits and other information related
to firm value. Multinationality is included in the model as “other
information” along with control variables such as firm size. In measur-
ing multinationality, we explicitly recognize Sullivan’s (1994) sugges-
tion to use composite index measures instead of single-item measures.
Sullivan argues that single-item measures, such as the ratio of a firm’sforeign sales to total sales (or foreign assets to total assets), do not
appropriately capture the multidimensionality of internationalization.
Also, we address the endogeneity or self-selection issue that the impact
of multinationality may be a result of better performing firms expand-
ing abroad (Dastidar, 2009; Gande et al., 2009). Firms that choose to
diversify are more likely to have higher values. Consequently, Campa
and Kedia (2002) argue that any examination of the relationship
between multinationality and firm value is incomplete without taking
self-selection into account.
We study the manufacturing firms listed in the Korea Stock
Exchange over the 7 years from 2003 to 2009 and identify positive
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incremental valuation effects of multinationality. The results are robust
over the years even for the period of global financial crisis when the
valuation effect is supposed to be decreased remarkably. We also find
that most of the positive relationships are derived from firms with highlevels of multinationality. The rest of this paper is organized as fol-
lows: The next section describes the theoretical background and
hypotheses of this study. Section 3 explains the estimation model, mea-
surement of multinationality, and data. Section 4 presents the empiri-
cal results, and the final section provides conclusions for the paper.
2. Theoretical Background and Hypotheses Development
2.1. Three Theories of Multinationality
Some theories predict positive relationships for the link between multi-
nationality and firm value, while others predict negative relationships;
each theory provides conditions under which its arguments hold. For
example, internalization theory predicts that multinationality enhances
the value of a firm by developing new markets for its intangible assets,
such as superior R&D and marketing capabilities, managerial and
production skills, and consumer goodwill.1 These proprietary intangi-ble assets are firm-specific advantages that cannot easily be copied or
exchanged but can be transferred to subsidiaries. Therefore, a firm
tries to maintain its competitive advantages over other firms by inter-
nalizing its foreign market activities in the form of direct investments.
An implication is that the value of a multinational firm with superior
intangible assets will increase by the degree of its foreign involvement.
Several empirical studies support the notion of internalization theory,
often using R&D and advertising expenditure as proxies of intangibleassets (Morck and Yeung, 1991; Gande et al., 2009).
Some theorists assert that imperfections in global capital markets
may enhance the value of multinationals.2 Investors may find it diffi-
cult to optimally diversify their portfolios internationally due to such
barriers as institutional restrictions on overseas capital flows and infor-
mation asymmetries. Therefore, multinationals provide investors with
better international diversification opportunities via their foreign direct
investments, which are expected to enhance the values of multination-
als in their home country relative to purely domestic firms. Although
there is empirical evidence to support the argument (Errunza and Sen-
bet, 1981, 1984; Kim and Lyn, 1986), investors may already be able to
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reap the benefits of international diversification if capital markets are
sufficiently integrated (Alder and Dumas, 1983). In this case, diversifi-
cation at a firm level has little value to the investors.
Managerial objective theory predicts that multinationality wouldhamper the firm. Managers, whose objective is to maximize their own
self-interest, do not always act in the best interest of shareholders, that
is, to maximize the value of their shares. In this situation, an agency
cost occurs. Multinationality would inevitably lead to more complex
corporate structures with many foreign subsidiaries, which makes it
more difficult for shareholders to monitor managerial decisions.3 This
gives the managers of such firms more opportunities to act in their
own self-interest, at the expense of shareholders. Moreover, managers
may seek overseas expansion even though it is not profitable to the
firm because they may reap higher salary, power, and prestige as the
firm grows in size. Therefore, differences in objectives between manag-
ers and shareholders can reduce the value of multinationals. Some
empirical studies support the tenets of this theory (Mishra and Gobeli,
1998; Click and Harrison, 2000; Denis et al., 2002; Kim and Mathur,
2008).
Country of origin is a recent additional factor for theoretical and
empirical developments in the context of multinationality-valuerelationships (and multinationality-performance relationships, as well).
Olsen and Elango (2005) report reductions in firm value with multina-
tional operations made by U.S. firms and increases in value for the
Continental European and Japanese firms, indicating that the market
valuation effect may differ on the basis of the environment in which
the firm is based. They interpret this as indicating that U.S. investors
do not value the additional cost, complexity, and risk induced by the
multinational activities of U.S. firms, because of their large domesticmarket. Eckert et al. (2010) also argue that, in terms of the multina-
tionality-value relationship, the U.S. firms may be a very special case
due to the size of their home market, and they report evidence of value
enhancement of German firms from their multinational activities.4
2.2. The Multinationality of Non-U.S. Firms
Three theories for multinationality, including internalization theory,
imperfection market theory, and managerial objective theory, have
been applied to U.S. multinational firms, and these theories have been
used for explicating the effects of multinationality; that is, while the
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first two theories support a positive relationship with firm perfor-
mance, the last theory supports a negative relationship. More recently,
researchers note overseas activities of firms based in Europe and Asia
and investigate the impact of multinationality of firms in these twocontinents. Study findings regarding multinationality for non-U.S. and
Korean firms are summarized in Table 1.
In a multivariate analysis using 35 countries’ data and excluding the
United States, Ferris et al. (2010) find that global diversification has
no significant relationship with excess value of firms. In the studies of
European firms, Olsen and Elango (2005) and Eckert et al. (2010) sup-
port a global diversification premium, while Capar and Kotabe (2003)
partially support a positive effect with a U-shaped relationship with
return on sales. On the other hand, in the studies of Asian firms, Pan
et al. (2010) find that global or country diversification has a negative
association with performance, but regional diversification has an
inverted U-shaped relationship with performance. For Japanese multi-
national firms, Goerzen and Beamish (2003) support a positive associa-
tion with firm performance, and Lu and Beamish (2001) support a
U-shaped relationship. In the studies of India and Taiwan, Chiang and
Yu (2005) and Pattnaik and Elango (2009) find an inverted S-shaped
relationship between multinationality and performance. Kim (2009)measures multinationality as the number of countries and subsidiaries
as well as foreign sales and supports a U-shaped relationship with the
former measure, but an inverted S-shaped relationship with the latter
measure. Studies on non-U.S. firms indicate that the effects of multina-
tionality are inconclusive according to not only measures of firm
performance and multinationality but also different countries.
2.3. The Multinationality of Korean Firms
Studies on multinationality have centered on the United States and
developed countries, and few studies have paid attention to small
countries such as Korea (Kim, 2009) and Taiwan (Chiang and Yu,
2005). Compared to other countries, Korea has three unique character-
istics for multinationality. First, Korea has successfully transformed its
economy and achieved economic growth in a short period. In the pro-
cess of transforming into a developed economy, its primary instrumen-
tal means has been exports, foreign direct investment, and overseas
manufacturing, and the Korean government has employed these
approaches to lead Korea’s export-oriented policies (Ahn et al., 2005;
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T a b l e 1 .
S t u d i e s o n M u l t i n a t i o n a l i t y o f N o n - U . S . F i r m s
C o u n t r i e s
A u t h o r ( s ) a n d y
e a r
F i r m p e r f o r m a n c e
M u l t i n a t i o n a l i t y
E m p i r i c a l fi n d i n g s
3 5 C o u n t r i e s
F e r r i s e t a l .
( 2 0 1 0 )
E x c e s s v a l u e
a n d T o b i n ’ s q
S e g m e n t s o f b u s i n e s s
o p e r a t i o n s
I n d u s t r i a l d i v e r s i fi c a
t i o n a l o n e
h a s a n e g a t i v e r e l a t i o n s h i p ;
g l o b a l d i v e r s i fi c a t i o
n a l o n e
h a s n o s i g n i fi c a n t r
e l a t i o n s h i p ;
a n d i n d u s t r i a l a n d
g l o b a l
d i v e r s i fi c a t i o n e a c h
h a s a
n e g a t i v e r e l a t i o n s h i p
U n i t e d S t a
t e s ,
E u r o p e , a
n d
J a p a n
O l s e n a n d E l a n g o
( 2 0 0 5 )
T o b i n ’ s q
A c o m p o s i t e i n d e x
u s i n g f o r e i g n s a l e s
r a t i o ,
f o r e i g n a s s e t s
r a t i o ,
a n d f o r e i g n
e m p l o y m e n t r a t i o
U . S .
fi r m s f a c e m u l t i n a t i o n a l
d i s c o u n t s ,
b u t E u r o p e a n d
J a p a n s h o w m u l t i n
a t i o n a l
p r e m i u m s
U n i t e d
K i n g d o m
G a r r o d a n d R e e s
( 1 9 9 8 )
S t o c k p r i c e
F o r e i g n a s s e t s a n d
f o r e i g n p r o fi t s
T h e r e i s v a l u a t i o n d
i ff e r e n c e
b e t w e e n d o m e s t i c a n d
m u l t i n a t i o n a l fi r m s
G e r m a n y
E c k e r t e t a l .
( 2 0 1 0
)
T o b i n ’ s q
F o r e i g n s a l e s t o t o t a l
s a l e s a n d f o r e i g n
a s s e t s ,
a n d t o t o t a l
a s s e t s
A p o s i t i v e r e l a t i o n s h i p
G e r m a n y
C a p a r a n d K o t a b e
( 2 0 0 3 )
R O S
F o r e i g n s a l e s r a t i o
A U - s
h a p e d c u r v i l i n
e a r
r e l a t i o n s h i p
I t a l y
M a j o c c h i e t a l .
( 2 0 0 5 )
E x p o r t i n g
F i r m s i z e a n d a g e
F i r m s i z e a n d a g e h a v e a
p o s i t i v e r e l a t i o n s h i p w i t h
e x p o r t i n g i n t e n s i t y
C h i n a
P a n g a r k a r a n d W u
( 2 0 1 2 )
R O A
I n d u s t r y g l o b a l i z a t i o n
A p o s i t i v e r e l a t i o n s h i p
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T a b l e 1 ( C o n t i n u e d )
C o u n t r i e s
A u t h o r ( s ) a n d y
e a r
F i r m p e r f o r m a n c e
M u l t i n a t i o n a l i t y
E m p i r i c a l fi n d i n g s
C h i n a
P a n e t a l .
( 2 0 1 0 )
R O E
C o u n t r y d i v e r s i fi c a t i o n
( f o r e i g n s a l e s ) a n d
r e g i o n a l d i v e r s i fi c a t i o
n
( e n t r o p y m e a s u r e )
F o r c o u n t r y d i v e r s i fi
c a t i o n ,
t h e y fi n d a n e g a t i v e
r e l a t i o n s h i p w i t h
p e r f o r m a n c e ,
a n d f
o r
r e g i o n a l d i v e r s i fi c a t i o n ,
t h e y
fi n d a n i n v e r t e d U - s
h a p e d
r e l a t i o n s h i p
J a p a n
G o e r z e n a n d
B e a m i s h ( 2 0 0 3 )
S h a r p e m e a s u r e ,
J e n s e n ’ s a l p h a ,
a n d m a r k e t - t o -
b o o k r a t i o
I n t e r n a t i o n a l a s s e t
d i s p e r s i o n a n d
c o u n t r y e n v i r o n m e n t
d i v e r s i t y
A p o s i t i v e r e l a t i o n w
i t h
i n t e r n a t i o n a l d i s p e r s i o n ,
b u t
a n e g a t i v e a s s o c i a t i o n w i t h
c o u n t r y e n v i r o n m e n t d i v e r s i t y
J a p a n
L u a n d B e a m i s h
( 2 0 0 1 )
R O A a n d R O S
F o r e i g n d i r e c t
i n v e s t m e n t
A U - c u r v e r e l a t i o n s h i p
J a p a n
J i n j i e t a l .
( 2 0 1 1 )
F o r e i g n d i r e c t
i n v e s t m e n t
T o b i n ’ s q
F i r m s h a v i n g h i g h e r
T o b i n ’ s q
t e n d t o c h o o s e m o r e F D I
I n d i a
P a t t n a i k a n d
E l a n g o ( 2 0 0 9 )
R O E
A fi r m ’ s r e v e n u e f r o m
f o r e i g n c o u n t r i e s
A n i n v e r t e d S - s
h a p e
d
r e l a t i o n s h i p b e t w e e
n
i n t e r n a t i o n a l i z a t i o n
a n d R O E
T a i w a n
C h i a n g a n d Y u
( 2 0 0 5 )
R O E
F o r e i g n a s s e t s
A n i n v e r t e d S - s
h a p e
d
r e l a t i o n s h i p b e t w e e
n
m u l t i n a t i o n a l i t y a n
d
p e r f o r m a n c e
K o r e a
K i m ( 2 0 0 9 )
R O A
N u m b e r o f c o u n t r i e s
a n d s u b s i d i a r i e s ,
f o r e i g n s a l e s
A U - s
h a p e d r e l a t i o n
s h i p
w i t h t h e n u m b e r o f c o u n t r i e s
a n d s u b s i d i a r i e s ; i n
v e r t e d
S - s
h a p e d r e l a t i o n s h
i p w i t h
f o r e i g n s a l e s
N o t e : R O A
, r e t u r n o n a s s e t s ; R O S ,
r e t u r n
o n s a l e s ; R O E ,
r e t u r n o n e q u i t y .
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Kim and Lee, 2007; Siegel, 2007). As a result, many Korean firms have
organized foreign subsidiaries and increased foreign business activities.
In particular, a form of business conglomerate called Chaebols, such as
Samsung and Hyundai, has become global multinationals throughfirm-specific advantages, which are unique capabilities proprietary
to the organization (Rugman and Oh, 2008). The adoption of market-
oriented economic policies by the Korean government and severe
competition in domestic markets have led Korean firms to engage
in international markets for their new growth opportunities. Thus,
compared to developed countries like Japan that reached high level of
multinationality due to active horizontal and vertical foreign direct
investments (Ahn et al., 2005), Korean firms have grown from small
companies with low levels of multinationality to Chaebols with high
levels of multinationality, allowing researchers to investigate the effects
of multinationality in an emerging market.
A second unique characteristic of Korean firms regarding multina-
tionality is that Korea experienced a turbulent currency crisis in 1997
and 1998 and a global financial crisis in 2008, and many firms went
bankrupt during this period. In particular, after the currency crisis,
Korean firms had considerable productivity growth because they
employed efficiency-oriented strategies, and the export-oriented firmsachieved more growth than the domestic firms (Rhee and Pyo, 2010).
Ahn et al. (2005) find that internationalization has a positive associa-
tion with productivity growth. Thus, Korea’s diverse economic envi-
ronment may reveal the important effects of multinationality well.
Third, Korea is sandwiched between two large countries, China and
Japan. China has achieved fast economic growth and enhanced techno-
logical competitiveness based on low costs of production and expanded
market opportunities. Japan is the world’s third largest economy afterthe United States and China and leads technology innovation and
produces important electronic components (Kwon and Chun, 2008).
Chinese firms are likely to catch up with Korean firms because they
have rich resources of labor and materials. On the other hand, because
of high gaps in technology levels between Korea and Japan, Korean
firms have continued to rely on technologies and components of
machineries from Japan. In this situation, Korea has attempted to
improve the competitiveness of manufacturing firms through exporting
(Choi et al., 2010). In light of these contexts, we argue that Korea
could be a definitive situation to test the impact of multinationality.
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2.4. Studies on Multinationality in Korea
Studies on multinationality in Korea have focused on motivations or
determinants for multinationality, assuming a positive relationship
between multinationality and performance. Rugman and Oh (2008)
find that Korean firms have motivations for multinationality, not for
exploiting country-specific advantages such as cheap and skilled labor
and government subsidies, but for exploiting firm-specific advantages
obtained by expanding research and development capacity and
advanced knowledge and skills. Korean firms consider physical dis-
tance (Erramilli et al., 1999), investment incentives, and trade barriers
(Kwon, 2002) when selecting target countries for foreign direct invest-
ment. It is only lately that the relationship between multinationalityand performance of Korean firms has drawn attention from research-
ers. For example, examining 231 firms from 2003 to 2005, Kim (2009)
finds that multinationality has a U-shaped relationship with firm per-
formance. One possible reason for the scarcity of multinationality
studies in Korea, we believe, is that there are few available databases
that record firms’ foreign business activities, such as foreign subsidiar-
ies and national and foreign sales.
Firms in small open economies, such as Korea and Singapore(Ahmed and Park, 1994; Moon et al., 1998), are forced to be inter-
national players early in their lifetimes and are required to reach a
certain degree of economy of scale through overseas expansion
because their home markets do not provide sufficient grounds for
survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,
2003). Thus, such firms are apt to overcome the liabilities of for-
eignness and to maintain their dynamic capabilities, defined as “the
firm’s ability to integrate, build and reconfigure its unique resources
to create new competitive advantages” (Maitland and Nicholas,
2002, p. 7). Accordingly, the market values overseas expansion per-
formed by firms originating in small open economies, despite the
associated additional costs and risks (Eckert et al., 2010). Also,
firms with lower levels of multinationality may not create more ben-
efits than costs through internationalization, because of huge initial
costs, while those with higher levels of multinationality may obtain
improved economy of scale, and thus the benefits of internationali-
zation would surpass the additional costs. Based on this line of argument, we propose the following hypothesis.
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H1: The multinational activities of Korean firms operating in a small open
economy are positively valued.
2.5. Reconsideration of Internalization Theory
A multinational firm is defined as a firm that owns and controls busi-
ness activities in two or more countries (Buckley and Casson, 2009).
Internalization theory explains that the boundaries of organizations
(Coase, 1937) are set where the benefits from multinational operations
are just offset by their costs. Multinational firms internalize business
activities that previously depended on price systems of markets if they
can maximize profits by putting such business activities under theircontrol. Firms will organize domestic or foreign subsidiaries whenever
markets provide resources less efficiently, such as raw materials, man-
agement services, and intangible assets. Thus, internalization theory
explains that multinational firms are organized to bypass inefficient
markets of resources, and this theory has been successfully applied to
multinational business activities (Buckley and Casson, 2009). Despite
the robustness of the theory, some researchers raise an issue about the
endogeneity of multinationality (Glaum and Oesterle, 2007; Hennart,2007; Dastidar, 2009). Dastidar (2009) argues that the higher firm per-
formance is not a consequence of international diversification, but is
rather caused by the fact that better performing firms expand abroad.
In other words, firms that have highly differential products and intan-
gible assets are likely to choose to go abroad to expand markets and
exploit opportunities. This was pointed out in a review of 40 years of
studies on internationalization and firm performance, conducted by
Glaum and Oesterle (2007) who observe that benefits simply accruefrom increased firm size rather than specifically from international
diversification. Hennart (2007) argues that firms that invest heavily in
intangible assets tend to exploit them through multinational opera-
tions. Thus, it is necessary to separate multinationality from intangi-
bles to understand effects on firm performance. Based on these
arguments, we propose the following hypothesis on the role of multi-
nationality.
H2: Multinationality mediates the relationship between firms’ intangibles
and their performance.
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3. Research Design
3.1. Research Model
We recognize that many prior studies have discussed valuation issuesbased on accounting-centric performance measures, such as return of
assets and return of sales, which are summarized in Table 2, but few
studies have dealt directly with the question of valuation. Accounting
performance measures, including firm profitability, sales growth, and
profit growth and margin, are based on the underlying assumptions
that profitability measures represent firms’ ability to generate earnings
and growth measures are visible and interpretable variables with little
influence by accounting principles. However, such measures are simply
one type of measures of firm performance and do not represent the
value of a firm regarding how much investors would pay to buy the
firm. In contrast, the stock market-centric measures represent the value
of a firm in terms of its equity price, which is what investors care
about (Christophe and Lee, 2005). Stock market-centric measures posit
that all business activities and the value of firms’ assets are ultimately
reflected in stock prices; this theory is supported by Fama’s (1970)
efficient market hypothesis.
The valuation model used in this study is based on Ohlson’s (1995)valuation model, which expresses an equity price as a function of cur-
rent book value per share, earnings per share, and other information.
Although Tobin’s q, the ratio of the market value of a firm’s assets to
the replacement cost of the firms’ assets, can be used as a stock market
measure, we prefer Ohlson’s valuation model because it provides two
further advantages. First, it is a valuation model that explains the rela-
tionship between a stock price and two explanatory variables (book
value per share and earnings per share). Other performance measures,such as return on assets (ROA) and return on sales (ROS), are just
dependent variables, not a model, making models using such perfor-
mance measures likely to be biased or misspecified. Many prior studies
have verified the validity of Ohlson’s model empirically (Myers, 1999;
Lo and Lyx, 2000; Morel, 2003). Additionally, the model measures
market value of a firm, like Tobin’s q, for reflecting the effects of
intangible assets as well as long-term effects of business activities.
Ohlson’s (1995) model is drawn from strict assumptions and deduc-
tive methods rather than from an empirical test. We use an empirical
version of Ohlson’s model that incorporates an intercept variable and
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supposes a non-unity coefficient of book value per share (Myers, 1999;
Lo and Lyx, 2000). That is,
Priceitþ1 ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageit þ eit ð1Þ
where Priceit + 1 = equity price of a firm i at t + 1, BPS it = book
value per share of a firm i at t, EPS it = earnings per share of a firm i
at t, Sizeit = log sales of a firm i at t, Leverageit = total debt/total
assets of a firm i at t and eit = error term.
In the equation (1), the equity price at t + 1 is the stock price at
the end day of 3 months after the end of the fiscal year. Because stock
price of a firm reflects its earnings information through earning
announcement generally, lead values for stock price relative to inde-
pendent variables are employed in the equation. Financial statementsare generally produced and released after 2 or 3 months later from a
Table 2. The Firm Performance Measures and Their Rationale
Performancemeasures Rationale Studies
Firm profitabilitywith ROA and ROS
A class of financialmetrics has used toaccess a business’s abilityto generate earnings,compared to its expensesand other relevant costsincurred during a specificperiod of time
Weill and Vitale (2002)and Mackey (2008)
Sales growth Sales growth is the mostvisible and interpretablevariable with little influence
of accounting principles
Jarvenpaa and Ives (1990)
Profit growth andprofit margin
Growth without profitabilityis not sustainable
O’Sullivan andAbela (2007)
Tobin’s q Tobin’s q is forward-lookingand risk-adjusted. The measurecan consider not only a firm’slong-term performance butalso the value of intangible assets
Ravichandranet al. (2009)
Ohlson’s valuationmodel
This is a model rather than a justperformance measure. The powerof explanation has been
tested in many previous studies
Garrod and Rees (1998)
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fiscal year, so the time is required for the information to be reflected in
stock price.5
Based on the equation (1), we develop several models to test our
two hypotheses. To test Hypothesis 1, we include multinationalityindex (MI ) and a binary variable to indicate a multinational or
domestic firm (MULTI ). MULTI is used to measure the difference in
effects between multinational firms and domestic firms, and MI is
used to measure the effect of multinationality within multinational
firms. Also, because our data are panel data, that is, time series and
cross-sectional data, we incorporate heterogeneity between firms and
serial correlations between years using a generalized linear mixed-
effects model (Fitzmaurice et al., 2004; Wooldridge, 2010). In a gener-
alized linear mixed-effects model, the stock price for the i firm at the
t year is assumed to differ from the population mean by a firm-spe-
cific effect (the fixed effects) and a within-firm measurement error (the
random effects). The within-firm measurement errors are indepen-
dently normally distributed with zero mean and constant variance.
Thus, the vector of regression parameters, b, describes how the mean
stock prices relate to covariates on average, and the vector of firm-
specific regression coefficients, a, describes how the trajectory of stock
price of i firm deviates from the overall population trend in thefollowing model.6 That is,
Priceitþ1 ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ b5MULTI þ b6MI þ ai þ eit ð2Þ
where MULTI = multinational or domestic firm (multinational = 1
and domestic = 0), MI = multinationality index, and ai = mixed effects
(random effects or fixed effects).
The variable, ai, is to control for individual firm heterogeneity
with a random effect model or a fixed effect model. The crucial dif-
ference between two models is whether individual firm effects are
related with other independent variables. A random effect model
assumes that individual effects are uncorrelated with the independent
variables, but a fixed effect model assumes that they are correlated
with the independent variables. Hausman (1978) proposes a test
based on the difference of estimates of two models that if individualeffects are correlated with the independent variables, the difference
between them should be statistically significant. If a random effect
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model is appropriate in estimating the equation (2), the variance
structure will be composed of a random component of ra
and a
measurement component re. The correlation between years is mod-
eled with a random component of ra.To test Hypothesis 2, we include an intangible assets variable
(INTAN ) which combines two variables — research and development
and advertisement expenditures to total assets. Then, we establish the
following four models to test the role of multinationality as a direct
effect, a direct mediated effect, an indirect mediated effect, and a
moderated effect.
MI ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageit
þ b5INTAN þ ai þ eit ð3aÞ
Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ
b5INTAN þ ai þ eit ð3bÞ
Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ
b5INTAN þ b6MI þ ai þ eit ð3cÞ
Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþb5INTAN þ b6MI þ b7MI INTAN þ ai þ eit ð3dÞ
3.2. Measurement of Multinationality
Multinationality has been measured in various ways in extant empiri-
cal studies, and this may be one of the reasons for the inconsistent
results (Annavarjula and Beldona, 2000; Kim, 2009). The majority of studies have used a single-item measure, such as ratio of foreign sales
to total sales (FSTS ) or ratio of foreign assets to total assets (FATA),
to assess multinationality. Sullivan (1994) notes that, although FSTS
(or FATA) objectively measures multinationality and thus is easy to
replicate, it represents only a limited portion of the multinational phe-
nomenon. Sullivan also points out that some conceptually irrelevant
factors, such as random shock in currency rates, may artificially inflate
or deflate a firm’s foreign sales, degrading the meaningfulness of
FSTS .
Instead, Sullivan (1994) has suggested using a composite index
composed of several single-item measures, including a performance
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measure (FSTS ), structural measures (FATA and the ratio of foreign
subsidiaries to total subsidiaries), and attitudinal measures (the over-
seas experience of top management and the psychic dispersion of the
countries in which the firm operates). Although this type of compositeindex has been criticized as lacking a theoretical background (Anna-
varjula and Beldona, 2000) and content validity (Ramaswamy et al.,
1996), it is technically more reliable and inclusive for measuring the
multidimensionality of multinational firms (Li, 2007).
We have composed a Sullivan-type composite index with four single-
item measures: FSTS , FATA, the number of overseas subsidiaries (SUB),
and the number of countries (NAT ) in which the subsidiaries operate. The
number of countries is included because it is possible for some firms to
have multiple subsidiaries concentrated in one or two countries, which
may cause a bias in estimating the true nature of their multinationality.
The numbers of subsidiaries and nations are converted into ratios
using a method that is consistent with that of Sanders and Carpenter
(1998), as follows. Each subsidiary is divided by the maximum number
of subsidiaries in each year’s sample; the result ranges from 0 to 1,
with 1 representing the firm with the largest number of foreign subsidi-
aries in a specific year. The same rule is applied to the nations, with 1
representing the firm with the largest number of countries in which itsforeign subsidiaries operate. To design a composite MI , the converted
ratios of subsidiaries (SUB) and nations (NAT ) are added to the FSTS
and FATA, which can be expressed as follows:
MI ¼ FSTS þ FATA þ SUB þ NAT
where FSTS = foreign sales/total sales, FATA = foreign assets/total
assets, SUB = subsidiaries/maximum number of subsidiaries in eachyear’s sample, and NAT = nations/maximum number of nations in
which subsidiaries operate in each year’s sample.
The maximum value of MI is 4, which represents a firm with maxi-
mum multinationality. We compare the results using this composite
index with those using each measure, to demonstrate how the results
of previous single-item studies might be biased.
3.3. Data
The sample in this study includes all manufacturing firms listed in the
Korea Stock Exchange from 2003 to 2009. Their share prices, book
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values of net assets per share, earnings per share, total assets, total
debt, research and development, advertisement, foreign sales, and
foreign assets are obtained from the KisValue, a database of listed
Korean firms. Only firms with December fiscal year end are includedin the sample. The share prices are those at the end of March of the
following year because the share prices of t + 1 based on Ohlson’s
model (equation 1) were included in the analysis. For example, for the
year 2009, the share prices are those at the end of March 2010. The
number of foreign subsidiaries and countries in which the subsidiar-
ies operate is obtained from the footnotes of the firms’ consolidated
financial statements that present the status of their consolidated
subsidiaries. International Financial Reporting Standards (IFRS) allow
firms to report the status of consolidated subsidiaries if the firms have
significant influence or control of the investee companies (Kieso et al.,
2011, pp. 893-900). We collect the national information of subsidiaries
from the consolidated financial statement if firms report the informa-
tion and glean it from the homepages of firms, otherwise. The sample
period covers 7 years, 2003 – 2009, inclusive, for 633 manufacturing
firms.
We, then, examine multinational firms using the criteria of foreign
sales, assets, subsidiaries, and nations. If a firm has nonzero values inall four variables (FSTS , FATA, SUB, and NAT ), and if its FSTS is
greater than 10 per cent (Denis et al., 2002; Eckert et al., 2010), we
classify it as a multinational firm. Otherwise, we classify it as a domes-
tic firm. Of the 633 manufacturing firms, we obtain 265 multinational
firms. Hypothesis 1 includes the comparison of multinationality effects
between domestic firms and multinational firms. However, the simple
comparison of multinational firms with domestic firms could lead to
selection bias (Heckman, 1979) because the sample size of the domes-tic firms is greater than that of the multinational firms. To control
selection bias in a sample matching method, we select the domestic
firms corresponding to the multinational firms using the propensity
score method with a probit model (Heckman, 1979; Dastidar, 2009).
That is,
Prðmulti ¼ 1Þ ¼ UðX 0bÞ; ð4Þ
where Pr is probability, Φ is a normal cumulative distribution func-
tion, b is a coefficient, and X is BPS , EPS , industry of firms, and total
assets. When matching a domestic firm to a multinational firm, we first
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apply industry and year criteria and then find the domestic firms with
the closest propensity score to that of the multinational firms. By
applying this rule, we obtain 393 domestic firms with 1,295 firm-year
observations that correspond to 265 multinational firms with 1,295firm-year observations. The sample size of domestic firms is larger than
that of multinational firms because the matching of samples is con-
ducted by industry first and by year second. Also, because firms could
be classified as domestic firms before they had become multinational
firms, the total number of firms is 552, not 658,7 but with the same
2,590 firm-year observations.8
4. Empirical Results
4.1. Descriptive Statistics and Correlations
Table 3 provides the descriptive statistics of the variables for the full
sample and for the domestic and multinational samples. The average
price per share in the full, domestic, and multinational samples are
32,355, 30,758, and 33,952 won (1$ = 1,090 won9 ), respectively, and
so, the average price per share in the multinational sample is greater
than that in the domestic sample. The average BPS values of thefull, domestic, and multinational sample are 33,764, 33,410, and
34,118, respectively, and so, the average BPS of the multinational
sample is greater than that of the domestic sample. This trend holds
for EPS , firm size, and leverage variables, with the multinational
sample showing greater values than the domestic sample. The
average value of intangibility, measured by research and develop-
ment and advertisement, is reversed, with the domestic sample
having twice as much as the multinational sample: 0.11 and 0.05,respectively.
MI is only observed in the multinational sample, and its average
value is 0.83 with minimum of 0.13 and maximum of 2.74. The FSTS
variable reveals that Korean-listed manufacturing firms generate an
average of 56 per cent of their sales from overseas locations during
our sample period of 2003 to 2009. It also shows that some firms
generate almost all of their sales (99 per cent) from outside Korea.
The range of FSTS starts around 10 per cent because of the restriction
criteria we imposed on the data. FATA shows that firms in the multi-
national sample possess on average 12 per cent of foreign assets, while
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the maximum figure is 99 per cent. The average values of SUB and
NAT are 0.05 and 0.09, respectively.
Table 4 presents the correlation coefficients for the set of variables
used in the model estimation. The dependent variable Price is highly
correlated with both BPS and EPS , as predicted in the Ohlson’s
model. As expected, firm size and intangibility have positive relation-
ships with Price, and Leverage has a negative relationship with Price.
Price has positive relationships with SUB and NAT , but negativerelationships with FSTS and FATA, revealing the possibility that each
single-item measure has a different effect on the firm value. Also, Price
Table 3. Descriptive Statistics
Variable Mean SD Min Max
Full Sample (2,590)Price 32355.44 94541.57 101.00 1319000.00BPS 33764.46 104731.34 18536.18 1704376.69EPS 2675.86 13499.54 278699.00 407015.00Firm size 26.36 1.62 20.47 32.12Leverage 44.04 20.06 0.99 214.07Intangibility 0.08 0.15 0.00 1.15
Domestic sample (1,295)Price 30758.44 104631.13 130.00 1319000.00BPS 33410.45 106689.27 1725.46 1704376.69EPS 2622.44 8790.65 27845.00 177163.00Firm size 25.72 1.19 20.79 30.07
Leverage 40.27 19.95 0.99 214.07Intangibility 0.11 0.18 0.00 1.12
Multinational sample (1,295)Price 33952.44 83248.69 101.00 900000.00BPS 34118.46 102568.10 18536.18 1509451.82EPS 2729.49 16950.95 278699.00 407015.00Firm size 27.00 1.74 20.47 32.12Leverage 47.80 19.46 1.23 118.09Intangibility 0.05 0.09 0.00 1.15MI 0.83 0.41 0.13 2.74FSTS 0.56 0.25 0.10 0.99
FATA 0.12 0.13 0.00 0.99SUB 0.05 0.10 0.00 1.00NAT 0.09 0.12 0.02 1.00
Notes: Price = Price per share at the end of the following March; BPS = book value pershare; EPS = earnings per share; Firm size = log sales; Leverage = (debt/total assets) 9 100;Intangibility = (R&D/Total assets)/max [each year (R&D/Total assets)] + (Advertisement/Total assets)/max [each year (Advertisement/Total assets)]; FSTS = (foreign sales/total sales)/max [each year (foreign sales/total sales)]; FATA = (foreign assets/total assets)/max [eachyear (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries);NAT = #nations/max (each year #nations); and MI = FSTS + FATA + SUB + NAT .
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T a b l e 4 .
C o r r e l a t i o n s B e t w e e n t h e
V a r i a b l e s
V a r i a b l e s
1
2
3
4
5
6
7
8
9
1 0
1 1
1 . P r i c e
1
2 . B P S
0 . 8 7 6 * * *
1
3 . E P S
0 . 7 3 2 * * *
0 . 6 9 8 * *
*
1
4 . F i r m s i z e
0 . 5 5 7 * * *
0 . 4 5 4 * *
*
0 . 4 0 0 * * *
1
5 . L e v e r a g e
0 . 1 4 7 * * *
0 . 2 5 7 * *
*
0 . 2 5 6 * * *
0 . 2 8 1 * * *
1
6 . I n t a n g i b i l i t y
0 . 1 1 8 * * *
0 . 0 0 4
0 . 1 0 5 * * *
0 . 0 2 0
0 . 1 2 6 * * *
1
7 . M I
0 . 0 3 7
0 . 1 2 1 * *
*
0 . 0 8 0 * *
0 . 2 0 4 * * *
0 . 1 7 0 * * *
0 . 1 7 0 * * *
1
8 . F S T S
0 . 0 6 0 * *
0 . 1 0 5 * *
*
0 . 0 8 9 * * *
0 . 0 4 0
0 . 0 8 5 * *
0 . 2 0 5 * * *
0 . 8 7
7 * * *
1
9 . F A T A
0 . 3 2 3 *
0 . 4 0 5 * *
*
0 . 2 6 5 * *
0 . 1 9 0 * * *
0 . 0 7 4 * *
0 . 1 4 2 * * *
0 . 5 7
4 * * *
0 . 4 9 1 * * *
1
1 0 . S U B
0 . 3 1 1 * * *
0 . 2 2 6 * *
*
0 . 1 8 1 * * *
0 . 5 3 0 * * *
0 . 1 7 3 * * *
0 . 1 8 7 * * *
0 . 3 9
1 * * *
0 . 1 0 5 * * *
0 . 0 3 5 1
1 1 . N A T
0 . 3 0 2 * * *
0 . 2 0 1 * *
*
0 . 1 6 6 * * *
0 . 5 2 6 * * *
0 . 1 8 1 * * *
0 . 2 1 2 * * *
0 . 4 1
2 * * *
0 . 1 1 4 * * *
0 . 0 0 2 0 . 9 2 3 * * *
1
ǂ < . 1
0 l e v e l ;
* < . 0
5 l e v e l ; * * < . 0
1 l e v e l ; * * *
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has a negative relationship with MI , but the relationship is not statisti-
cally significant.
4.2. Model Estimation
The estimated results of the generalized linear mixed-effects model with
equations (1) and (2) are presented in Table 5. To identify a model
between a fixed effect model and a random effect model in the equa-
tion (2), we conduct a Hausman test (Hausman, 1978). The statistics
of Hausman test with Model 2, Model 3, and Model 4 are 0.41 (p =
.81), 4.90 (p = .17), and 3.68 (p = .15), respectively. In other models,
we do not find any statistically significant difference too. The result
indicates that estimation results of a fixed effect model and a random
effect model are consistent, and individual effects are uncorrelated with
other independent variables in the model. Therefore, we employ a
random effect model in estimating the equations 2 and 3.10
The effects on valuation of Korean firms are tested in two ways, first
by comparing the domestic sample with multinational samples (Model 3)
and then by identifying the impact of multinationality within the multi-
national sample (models 4 – 8). Along with the composite variable MI ,
each of the four single-item measures of FSTS , FATA, SUB, and NAT isseparately estimated in models 4 through 8, respectively. Each coefficient
and its significance is tested with restricted maximum likelihood (REML)
estimation (Fitzmaurice et al., 2004, p. 99). As expected in Ohlson’s
model, BPS and EPS have significant positive relationships with the
share values, which is qualitatively similar to the results of previous stud-
ies. After adding two additional variables, firm size and leverage, BPS
and EPS still have significant positive relationships with stock price, and
firm size has a significant positive relationship with stock price, but lever-age has a significant negative relationship with stock price.
The focus of Hypothesis 1 is on the valuation of multinational
firms. Model 3 shows that multinational firms have higher valuation
than domestic firms after controlling for firm size and leverage, and
multinational firms have 5,568 Korean won higher valuation on aver-
age (equivalent to $5 based on an exchange rate of 1,090 won to $1).
Focusing on the relationship between the share price and multination-
ality of multinational firms, Model 4 with its composite index of
MI presents a significant positive relationship. Also, models 5 through
8 show the valuation effects of the four single-item measures. The
coefficients of FSTS and FATA are not significant although they are
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T a b l e 5 .
V a l u a t i o n E ff e c t s o f M u l t i n a t i o n a l F i r m s a n d M u l t i n a t i o n a l i t y W i t h S t o c k P
r i c e
M o d e l 1
M o d e
l 2
M o d e l 3
M o d e l 4
M o d e l 5
M
o d e l 6
M o d e l 7
M o d e l 8
M U L T I
M
I
F S T S
F
A T A
S U B
N A T
I n t e r c e p t
8 , 1 8 6 * * *
( 4 . 3
8 )
2 2 8 , 6 8 6 * * *
( 1 0 . 0
3 )
2 4 2 , 8 9 9 * * *
( 1 0 . 3
8 )
2 3 1 , 1
8 7 * * *
( 7 . 5
2 )
2 5 0 , 0 9 7 * * *
( 8 . 0 5 )
2 5 0 , 3
4 7 * * *
( 8 . 0 4 )
1 5 3 , 6 5 9 * * *
( 5 . 0 7 )
1 4 6 , 4 8 2 * * *
( 4 . 6 4 )
B P S
0 . 6 8 6 * * *
( 4 5 . 1 4 )
0 . 6 6 5 *
* *
( 4 4 . 7 0 )
0 . 6 6 5 * * *
( 4 4 . 7 9 )
0 . 7 0 8 * * *
( 3 2 . 5 0 )
0 . 7 1 4 * * *
( 3 2 . 1 6 )
0 . 7 1 5 * * *
( 3 2 . 1 9 )
0 . 6 8 3 * * *
( 3 3 . 7 8 )
0
. 6 9 0 * * *
( 3 3 . 6 8 )
E P S
0 . 2 2 9 * * *
( 4 . 4
1 )
0 . 2 0 1 * *
*
( 3 . 8
9 )
0 . 1 9 8 * * *
( 3 . 8
4 )
0 . 1 5 9 *
( 2 . 0 7 )
0 . 1 5 9 *
( 2 . 0
8 )
0 . 1 5 8 *
( 2 . 0
6 )
0 . 1 2 6 *
( 2 . 4
8 )
0
. 1 5 4 * *
( 2 . 5
7 )
F i r m s i z e
9 , 2 9 7 * *
*
( 1 0 . 5 1 )
9 , 9 2 6 * * *
( 1 0 . 8 5 )
8 , 7 7 2 * * *
( 7 . 3 6 )
9 , 8 9 7 * * *
( 8 . 3
4 )
9 , 9 9 7 * * *
( 8 . 4
4 )
6 , 1 2 7 * * *
( 5 . 2
5 )
5
, 7 3 2 * * *
( 4 . 6
8 )
L e v e r a g e
1 3 , 9 3
3 * *
( 2 . 6 0
)
1 2 , 8
0 5 * *
( 2 . 8 5 )
2 1 , 6 1 3 * *
( 2 . 6
9 )
1 9 , 9
8 3 * *
( 2 . 4 6 )
2 0 , 3 1 3 * *
( 2 . 4 9 )
2 8 , 3
0 6 *
( 2 . 3 8 )
2 0 , 2
7 6 * *
( 2 . 6 1 )
M u l t i n a t i o n a l
d u m m y
5 , 5 6 8 * *
( 2 . 6
0 )
M u l t i n a t i o n a l i t y
1 8 , 7 8
4 * * *
( 4 . 7 3 )
5 , 0 2 6
( 0 . 4
3 )
3 , 7 6 4
( 0 . 4
3 )
1 4 2 , 9 7 5 * * *
( 9 . 3
8 )
1
3 2 , 3
2 0 * * *
( 8 . 2
4 )
R 2
. 7 4 1
. 7 6 2
. 7 6 3
. 8 0 6
. 7 9 8
. 7 9 9
. 8 3 0
. 8 2 6
N o .
o b s e r v
a t i o n s
2 , 5 9 0
2 , 5 9 0
2 , 5 9 0
1 , 2 9 5
1 , 2 9 5
1 , 2 9 5
1 , 2 9 5
1
, 2 9 5
N o t e s : T h i s t a b l e p r e s e n t s t h e v a l u a t i o n e ff e c t s o f m u l t i n a t i o n a l fi r m s c o m p a r e d t o d o m e s t i c fi r m s , a s w
e l l a s m u l t i n a t i o n a l i t y . T h e d e p
e n d e n t v a r i -
a b l e i s a n e
q u i t y p r i c e a t t h e e n d o f t h e f o l l o w i n g M a r c h .
T h e s t a t i s t i c i n b r a c k e t s i s t h e W h i t e - a d j u s t e d t - s t a t i s t i c . M u l t i n a t i o n a l d u m m
y ( M U L T I )
i s a b i n a r y
v a r i a b l e a s 1 f o r m u l t i n a t i o n a
l fi r m s a n d 0 f o r d o m e s t i c fi r m s . M u l t i n a t i o n a l i t y v a r i a b l e ( M
I ) i s a c o m p o s i t e i n d e x o f F S T S , F A T A ,
S U B ,
a n d
N A T .
O t h e r v a r i a b l e s a r e m
e a s u r e d a s f o l l o w s : B P S = b o o k v a l u e p e r s h a r e ; E P S =
e a r n i n g s p e r s h a r e , F i r m s i z e
=
l o g s a l e s ;
L e v e r a g e =
( d e b t / t o t a l a s s e t s ) 9
1 0 0 ; F S T
S =
( f o r e i g n s a l e s / t o t a l s a l e s ) / m a x [ e a c h y e a r ( f o r e i g n s a l e s / t o t a l s a l e s ) ] ; F A T A =
( f o r e i g n
a s s e t s / t o t a l
a s s e t s ) / m a x
[ e a c h y e a r ( f o r e i g n a s s e t s / t o t a l a s s e t s ) ] ; S U B =
# s u b s i d i a r i e s / m a x ( e a c h y e a r # s u b s i �