Assessing the Effect of Corporate International Diversification on Shareholder-Bondholder Value

Abstract

This study investigates whether international diversification, measured as foreign assets and foreign sales increase shareholder value while decreasing bondholder value (i.e., whether there is a diversification discount). Events such as foreign expansion may indeed increase shareholder value while decreasing bondholder value (hypothesis). The study also considers the extent to which debt-size in a firm’s capital structure plays a role in valuation of foreign assets and foreign sales. Using foreign assets and foreign sales data, the study reports three important results. First, shareholder value is positively related to foreign involvement, casting doubt on global discount, consistent with evidence in Santos et al. (2003), suggesting that significant wealth gains accrue to shareholders of international diversified firms. Second, bondholder value is inversely associated with foreign sales whereas foreign assets are positively related to bondholder value, implying that foreign operations are in part externally financed. Furthermore, high-leverage, medium-leverage and relatively low-leverage firms are positively associated with shareholder value, with medium-size debt enjoying greater capitalization. Overall, the results confirm that increased foreign expansion appears to increase shareholder value, consistent with the multinational network framework predicting a positive influence on value.