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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Does multinationality matter? Evidence of value destruction in U.S. multinational corporations
Reid W. Click
Paul Harrison
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.


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Reid W. Click & Paul Harrison, Does multinationality matter? Evidence of value destruction in U.S. multinational corporations, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2000-21, 2000.
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Keywords: International business enterprises ; Investments; Foreign ; Capital market
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