does multinationalization help capital?

Doug Henwood dhenwood at panix.com
Fri Sep 29 07:58:26 PDT 2000


"Does Multinationality Matter? Evidence of Value Destruction in

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

Paper Requests:

Please indicate the title and the FEDS paper number. Single

copies of FEDS papers may be obtained upon request from Ms.

Karen Blackwell, Mailto:fedspapers at frb.gov Postal: Mail Stop 77,

Federal Reserve Board, Washington, DC 20551. Phone:(202)

452-2900. Fax:(202) 452-3819.

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



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