Shareholder Benefits from Corporate International Diversification



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    • Associate Professor of Finance, Kansas State University. I would like to thank James Ang, Jess Chua, Randolph Pohlman, and an anonymous referee for their valuable comments. Financial support from Phillips Petroleum Company is gratefully acknowledged. I thank Capital Guardian Trust Company for providing the World Index data.


This study provides further evidence on the rates of return realized by the shareholders of multinational firms relative to those of purely domestic firms. The results indicate that the risk-adjusted returns realized by the shareholders are identical across the two groups except where the MNC operates in competitive foreign markets. In that case, MNC shareholders experience negative abnormal returns. The study also provides further evidence on the risk-reduction effect of international diversification. The results fail to support the hypothesis that the beta is a convex function of the degree of international involvement. Finally, the paper provides some preliminary evidence on the effect of corporate international diversification on shareholders' returns. It is found that abnormal returns rise by some 18 percent during the 14 months preceding the initial foreign diversification.