STATES OF THE ECONOMY AND GEOGRAPHIC INVESTMENT DECISIONS

C. Catherine Chiang and Yilun Shi

The International Journal of Business and Finance Research, 2016, vol. 10, issue 1, 39-52

Abstract: We examine the impact of economic conditions on firm performance after geographic expansions and divestures. We conjecture that different economy conditions during which a firm expands in and out of geographic territories affect the firm’s ability to transform its resources into competitive edges. The difference in the ability of a firm to convert resources to advantages, in turn, leads to variations in operating performance subsequent to geographic expansions and divestures. We conduct empirical tests of our hypotheses using corporation self-disclosed segment data from 1979 to 2008 from COMPUSTAT. We find that, during weak economic cycles, geographic expansions result in sustained long-term profitability. Specifically, firms’ geographic expansion decisions contribute 5.4% and 3.9% per year to industry-adjusted annual return on assets (ROA) over 4- and 5-year periods, respectively. On the other hand, geographic divestures enacted during a weak economy do not help improve firm performance. Moreover, both strong and weak economic conditions enhance performance of geographic expansion over two years but have no long-term effects. Finally, the state of the economy during which time geographic divesture takes place does not affect subsequent operating performance.

Keywords: Geographic Diversification and Divesture; Operating Performance; Resource-Based View (search for similar items in EconPapers)
JEL-codes: F2 L1 L25 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ibf:ijbfre:v:10:y:2016:i:1:p:39-52

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