Are firms from developed markets more international than firms from emerging markets?

Regionalist supporters’ claim that most of the world's largest firms are regional rather than global and that managers should be encouraged to ‘think regional, act local and forget global’ (Rugman and Moore, 2004, p. 67). We apply the matrix of multinationality proposed by Aggarwal et al. (2011) to a sample of the world's 500 largest corporations, the Fortune Global 500. We show that these firms range from purely domestic to regional, trans-regional and entirely global with most lying in the trans-regional and global categories. Our results imply that global strategies are essential to international trade and management in today's business environment. We compare multinationality results by market type (developed versus emerging market), industry, size and age. We find that firms from more advanced economies tend to be older, larger and more multinational than firms from emerging markets. We find no relationship between multinationality and age or multinationality and size, and conclude that developed market firms are not more multinational as a result of size, age or industrial structure.     

Settling the debate on multinational capital structure using the CEPR measure

Portfolio theory suggests that because of diversification benefits, multinational corporations (MNCs) should have lower risk and therefore could have more debt. Empirical studies, however, have repeatedly shown that MNCs from the US face higher risks and have lower debt levels. Burgman (1996) suggests that agency costs as well as political and exchange rate risks are the explanation. Kwok and Reeb (2000) explain this puzzle, presenting an upstream-downstream hypothesis suggesting that MNCs from emerging markets reduce their risk by going international (they go to safer markets), while firms from developed countries increase their risk by going abroad (they go to riskier markets). By introducing a new measure of Country Export Partner Risk (CEPR), we show that the weighted average risk level of a country's export trading partners is negatively related to the leverage of its multinationals, thus confirming the upstream-downstream hypothesis. Furthermore, once controlling for CEPR, we find that the multinationality of the firm is positively related to leverage, thus lending support to the traditional diversification argument. Our findings, therefore, help settle the debate between these two opposing streams of multinational capital structure literature.     

The value of multinationality and business group for Japanese firms

We provide evidence for the combined value impacts of corporate multinationality and business group affiliation, incorporating the effect of endogeneity of diversification decisions. The results for Japanese industrial firms indicate that multinational firms have a statistically significant 2.3% value premium during FY1995–2011 relative to comparable domestic firms; however, the multinationality premium is moderated by the nature of business group as well as the characteristics of the host country. Specifically, the multinationality premium is negatively associated with both keiretsu membership and main bank ownership of group firms. Main bank ownership as well as vertical keiretsu affiliation positively impact the value of multinationality for firms operating in developing countries. These results hold even during the later part of the sample period, when the keiretsu and main bank systems have been under pressure. The implication is that corporate multinationality is a substitute for business group and for inadequate indigenous institutional infrastructure.     

The multinational bank: A financial MNC?

The theory of non-financial multinational corporations is applied to the multinational commercial bank. The incentives toward multinationality that characterize the expansion of non-financial firms have their counterparts in multinational banks. The theory of the MNC provides a useful basis for the development of a theory of the multinational bank when the subsidiary offices operate in foreign financial markets. When banks' foreign subsidiaries operate in supranational markets (such as the Eurocurrency markets), there is little or no equivalence because the multinational banks compete only among themselves: there is no competition with indigenous firms. The supranational markets give rise to a distinct type of subsidiary. These banking offices and the markets in which they operate serve to integrate national capital and money markets with some possible endangerment to the stability of the international financial system.     

Corporate diversification and performance: evidence on production efficiency

This study utilizes the COMPUSTAT database to extract 31,002 firm-year observations for the firms publicly traded on US exchanges during the 1995–2001 period, and examines the relationship between corporate international diversification and technical productive efficiency. The parameters of a stochastic frontier function are estimated simultaneously with the firm-specific production inefficiency effects in a panel framework. After controlling for product diversification, industry and firm size, the author finds the degree of international diversification is positively related to production efficiency. The results are robust to the choice of multinationality variables including number of geographic segments, foreign income ratio and foreign tax ratio. In all, the results suggest that multinational corporations are utilizing their operating flexibility.     

The Effect of Volume of Intrafirm Transfers on Market Metrics

In this paper, we examine the relationship between international intrafirm area transfers and market metrics as measured by market-to-book value and systematic risk. Intrafirm transfers – the amount that multinational corporations charge one another for the transfer of goods, intellectual property, and services – have become an increasingly important issue for policymaking, managerial, financial, and tax purposes. This paper also examines whether international intrafirm intergeographic area transfers are attributed to corporate tax. We find that firms with a sizable volume of international intrafirm transfers have higher systematic risk than comparable firms without these transfers. We show cross-sectionally that firms engage in international transfers have a higher market-to-book ratio, suggesting that transfers add value through their effect on earnings and taxes. Consistent with Mills and Newberry (2003) and Collins, Kemsley, and Lang (1998), we document that U.S. (global) income tax is positively (negatively) related to intrafirm transfers, implying that U.S. multinational firms shifted taxable income to the United States from 1995 to 1999.     

Differences in Factor Structures between U.S. Multinational and Domestic Corporations: Evidence from Bilinear Paradigm Tests

This research investigates the differences in factor structure between U.S. multinational and domestic corporations. We use a multifactor return generating process and investigate whether the constraints imposed by the arbitrage pricing theory are upheld. Our results indicate and domestic corporations are not significantly different. It does appear, however, that there are different prices attached to the risk of U.S. multinational and domestic firms.     

Value of Multinationality: Internalization, Managerial Self-interest, and Managerial Compensation

In this paper, we examine the impact of managerial self-interest on the value of multinationality. Since agency theory also suggests that a divergence between the interests of managers and shareholders can be aligned by effective managerial incentive, we also examine the effect of managerial compensation on the value of multinationality. Our results show that for high- Q (Tobin's Q > 1 ) firms, investors do not associate the spending of free cash flow on multinationality with the problem of overinvestments. For high- Q firms, it is also found that the value of multinationality can be enhanced by effective managerial incentives. For low- Q firms (Tobin's Q < 1 ), it is found that the concern of managerial self-interest overwhelms the benefits of internalization, making multinationality a value-decreasing event. For low- Q firms, managerial compensation is also ineffective in promoting value-enhancing foreign direct investments.     

Does multinationality matter? Implications of operational hedging for the exchange risk exposure

An important issue in global corporate risk management is whether the multinationality of a firm matters in terms of its effect on exchange risk exposure. In this paper, we examine the exchange risk exposure of US firms during 1983–2006, comparing multinational and non-multinational firms and focusing on the role of operational hedging. Since MNCs and non-multinationals differ in size and other characteristics, we construct matched samples of MNCs and non-multinationals based on the propensity score method. We find that the multinationality in fact matters for a firm’s exchange exposure but not in the way usually presumed – the exchange risk exposures are actually smaller and less significant for MNCs than non-multinationals. The results are robust with respect to different samples and model specifications. There is evidence that operational hedging decreases a firm’s exchange risk exposure and increases its stock returns. The effective deployment of operational risk management strategies provides one reason why MNCs may have insignificant exchange risk exposure estimates.     

Geographic diversification and agency costs of debt of multinational firms

This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm–year observations for multinational and domestic firms over the 1988–1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.     

Exposure to currency risk by US multinational corporations

Despite evidence that large US multinational corporations are hedging their exchange rate risk exposure, existing literature on the measurement of exchange rate risk does not give us a tool to measure the effect of such hedging activities of multinational firms. This paper revisited the measurement of exchange rate risk exposure using the cumulative translation adjustment as a trade-weighted dollar index faced by individual companies. We find that especially small multinational firms are exposed to foreign exchange risk and benefit from a weakening in the international value of the US dollar. The results also indicate that hedging activities by large firms are not so effective to eliminate exchange risk. Two industries in particular show a highly significant relation between changes in the cumulative translation account and equity returns, however, with an opposite sign, i.e. positive for electrical equipment and negative for primary metals.     

Shareholders’ tax incentives and changes in the organizational form of foreign operations

This study examines whether the tax incentives of home-country shareholders influence the organizational form changes of foreign operations. While a corporation and a limited company (LC) in South Korea are treated the same for Korean tax purposes, an LC can be treated as a pass-through entity for U.S. tax purposes. This tax treatment of LCs can create incentives for U.S. owners to convert their Korean corporations to LCs. We find that private corporations owned by U.S. shareholders are more likely to convert to LCs than those owned by non-U.S. shareholders. We also find that the tax costs and benefits of conversion affect the likelihood of LC conversion for U.S.-owned firms. Overall, our results suggest that multinational corporations use organizational form changes as a tool for international tax strategies.     

The capital structure of multinational corporations: Canadian versus U.S. evidence

Contrary to the U.S. evidence, we show that Canadian multinational corporations (MNCs) display higher leverage than domestic firms (DCs). This higher leverage is due to lower agency costs of debt associated with MNCs' U.S. operations. We also find that the Canadian firms with international bond market access have higher leverage than firms without such access. Comparison with a U.S. matched sample shows that the sensitivity of leverage to firm-specific factors differs between the two countries, especially for the MNCs samples. Our evidence indicates that capital structures of MNCs are a complex interaction of both home and host country factors and differences in leverage determinants across countries.     

Foreign exchange exposure and multinationality

We examine the relation between firms’ foreign exchange exposure and the extent of their multinationality as a proxy for operational hedging. Using a sample of 953 US firms over the period 1999–2006, we show that there is a nonlinear relation between operational and financial hedging, confirming anecdotal evidence that many highly multinational firms do not hedge with derivatives. We find that operational hedging and financial hedging are significantly inversely related to firms’ foreign exchange exposure, providing evidence that the two hedging techniques are complementary for all but the most highly operationally hedged firms. By comparing our findings for 1999–2006 with 1999–2009, we show that this complementarity breaks down when exchange rate volatility is high – as the effectiveness of financial hedging diminishes. An important message for firms is that operational hedges work, and they potentially provide better protection than financial hedging during times of stress.     

Corporate Multinationality and Acquirer Returns

This paper provides evidence on how corporate multinationality from the perspective of acquiring firms relates to M&A returns. Using multivariate regressions and a large dataset of over 6,000 M&As (both cross-border and domestic) by UK firms during 1987 to 2014, the paper finds multinationality to be associated with significantly higher short-run announcement returns and long-run operating performance. While the multinationality premium (higher M&A returns for multinationals) persists over time, it seems to be restricted to firms with superior resource/managerial capabilities and minimal agency problems. Finally, the multinationality premium appears to be driven by foreign acquisitions into advanced economies. The results are robust to correcting for sample selection bias and controlling for several firm and deal characteristics, as well as accounting for firm-, industry-, and year-fixed effects. Collectively, the findings imply that multinationality could be a source of value creation for acquiring firms, particularly in foreign acquisitions, which tend to be complex, and, thereby, require superior managerial capabilities to succeed.     

Foreign Exchange Risk,Hedging, and Tax-Motivated Outbound Income Shifting

Although outbound income shifting to low-tax jurisdictions provides tax savings, it is often accompanied by nontax costs. In this study, I examine whether foreign exchange (FX) risk constrains tax-motivated outbound income shifting by U.S. multinational corporations. My findings indicate that exposure to greater currency volatility is associated with less outbound income shifting, and this effect is stronger for firms with foreign affiliates using foreign functional currencies. I also investigate whether hedging facilitates outbound income shifting. Consistent with hedging lowering costs associated with exchange rate volatility, I find that U.S. firms that use more currency derivatives tend to shift more income to low-tax foreign jurisdictions. Overall, these findings suggest that FX risk is an important cost of outbound income shifting.     

THE RISE IN MANAGERIAL STOCK OWNERSHIP

Despite the widespread view from Berle and Means onward that ownership of U.S. companies has become increasingly separated from managerial control, the authors report that managerial ownership of public corporations is markedly higher today than in 1935. Using a comprehensive sample of the 1,500 publicly traded firms in 1935 and a comparable sample of 4,200 firms in 1995, their study finds that managerial ownership increased from an average of 13% in 1935 to 21% in 1995. In terms of real (1995) dollar values, average managerial ownership increased from $18 million to $73 million over the same 60‐year period. One potential explanation for this increase is that greater reliance on managerial ownership has substituted for less reliance on other incentive alignment devices, such as pay‐for performance and the market for corporate control. The authors, however, report just the opposite. The use of such other corporate governance mechanisms has generally also increased over time, suggesting that the top managements of today's publicly traded corporations face greater pressure from investors and boards of directors than managements earlier in the century. An alternative explanation concern possible changes over time in the effects of certain company characteristics on the costs and benefits of using managerial ownership as a control device. While most of the characteristics the authors examined had the same relationship to managerial ownership in both periods, the role of volatility was different. In 1935, managerial ownership was inversely related to firm volatility; that is, higher volatility was associated with lower managerial ownership. In 1995, however, the relationship of managerial ownership to volatility was “nonlinear”; managerial ownership was positively related to firm volatility at low and moderate levels of volatility but the relationship turns negative when firm volatility is high. The overall lower level of volatility today, together with advances in capital markets and financial theory that have reduced the costs of hedging, appear to have reduced the costs of managers holding large stakes in their firms.     

An Empirical Study of the Consequences of U.S. Tax Rules for International Acquisitions by U.S. Firms

This article examines the effect of tax factors on the equity values of U.S. multinational corporations making foreign acquisitions. Abnormal stock returns are found to be related to a tax variable that captures differences in the international tax status of acquiring firms but not related to a naive tax variable that captures differences between tax rates in target countries and the United States. Our evidence suggests that aggregate intercountry differentials in after-tax returns are competed away, while firm-specific, tax-related advantages (or disadvantages) are reflected in abnormal returns around the announcement date of the acquisition.     

Multinational Diversification and Corporate Performance: Evidence from European Firms

We investigate the empirical relationship between accounting based measures of performance and the degree of multinational diversification for a set of European chemical industry firms. We find that for these firms, the degree of multinational diversification is strongly related to superior financial performance. The results hold for each of the three sample years. The findings suggest that multinational firms outperform purely domestic and exporting firms. The results provide strong support for gains from multinational diversification. The results indicate that while greater European unification may have eroded potential benefits of exploiting international capital and product market imperfections, the benefits of firm specific economies of scope and scale as well as managerial and financial synergies are still realised through exports.     

Political Environment and Chinese OFDI Under RMB Appreciation: A Panel Data Analysis

We examine the role of political environment (PE) in determining Chinese multinational corporations’ (MNCs) investment decisions considering the RenMinBi (RMB) exchange rate (ER) movement. System generalized method of moments, feasible generalized least squares, and fixed effect estimations are employed to conduct a panel data analysis of 92 countries for the period of 2003–2015. Our empirical results reveal that Chinese outward foreign direct investment (OFDI) responds negatively to ER risk and political risks individually. After introducing the joint effect of PE and ER movement, the results suggest that Chinese OFDI’s risk preference to PE is reversed when RMB is appreciating. We argue that Chinese firms are still risk-avert when considering investing abroad. The empirical result shed light on better understating of Chinese OFDI patterns and motivations.