U.S. Multinational Corporations"
BY: REID W. CLICK
George Washington University
Department of International Business
PAUL HARRISON
Board of Governors of the Federal Reserve System
Brandeis University
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Paper ID: FEDS Working Paper No. 2000-21
Date: February 2000
Contact: PAUL HARRISON
Email: Mailto:paul.harrison at frb.gov
Postal: Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, DC 20551 USA
Phone: 202-452-3634
Fax: 202-452-3819
Co-Auth: REID W. CLICK
Email: Mailto:rclick at gwis2.circ.gwu.edu
Postal: George Washington University
Department of International Business
2023 G Street NW
Washington, DC 20052 USA
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ABSTRACT:
We document that capital markets penalize corporate
multinationality by putting a lower value on the equity of
multinational corporations than on otherwise similar domestic
corporations. Using Tobin's q, the multinational discount is
estimated to be in the range of 8.6% to 17.1%. The most
important mechanism of value destruction is an asset channel in
which multinationals have disproportionately high levels of
assets in relation to the earnings they generate. Foreign assets
are particularly associated with value destruction. In contrast,
exporting from U.S. operations is associated with an export
premium - of approximately 3.9% - resulting from both a higher
market value and a lower asset size. Given these findings, we
ask why firms become multinationals. Evidence reveals that the
portion of a firm owned by management is inversely related to
the likelihood that the firm is a multinational, so we conclude
that managers who do not own much of the firm may be building
multinational empires for private gains at the expense of the
shareholders.
Keywords: multinationality, Tobin's Q, foreign assets