Valuation effects of global diversification

Amar Gande, Christoph Schenzler and Lemma W Senbet
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Amar Gande: Cox School of Business, Southern Methodist University, Dallas, USA
Christoph Schenzler: Owen Graduate School of Management, Vanderbilt University, Nashville, USA
Lemma W Senbet: Robert H. Smith School of Business, University of Maryland, USA

Journal of International Business Studies, 2009, vol. 40, issue 9, 1515-1532

Abstract: This paper examines the effect of global diversification on firm value using a data set of US firms from 1994 to 2002. We document that global diversification enhances firm value. Specifically, we find that Tobin's q, our proxy for firm value, increases with foreign sales (measured as a fraction of the firm's total sales), even after we control for well-known determinants of firm value. In contrast, we find no such evidence for industrial diversification. We find evidence of both financial and real effects driving such a value enhancement from global diversification. Furthermore, we find that the valuation benefits from global diversification are higher if the firm diversifies into countries with creditor rights that are stronger than those of the United States. Our results are also robust to controlling for the firm's endogenous choice to diversify across countries or across industries. Our study is anchored by the theories of both the financial and real dimensions of global diversification, and our results support both theories. Overall, our results provide a unifying view that global diversification benefits are driven by both the real and financial dimensions.

Date: 2009
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