Corporate diversification, debt maturity structures and firm value: The role of geographic segment data

Abstract

In this paper, we investigate whether foreign and domestic assets of US firms are financed with borrowed funds (e.g., with short-and long-term debt maturity structures). Our regression analysis documents a positive association between foreign assets and long-term debt, and a negative association between foreign assets and short-term debt. Estimation results show that 1% increase in FAS leads to, on average, a 39 percent increase in leverage, an economically important effect. We also document the opposite relations between long-term (negative relation) and short-term (positive relation) and domestic fixed assets. Further analysis suggests that a one percent increase in domestic assets corresponds to -20.13% decrease in long-term debt, while a 1% increase in domestic assets raises short-term debt by 16.66 percent, on average. We further find that foreign assets are incrementally, positively associated with Tobin’s q, indicating that foreign investment is a successful path to higher equity value, a result inconsistent with Denis et al (2002). In the partition sample, we find that variation in debt affects the pricing of foreign assets. We document that foreign assets of high debt-to-asset ratios are positively related to Tobin’s q, whereas the relation is less positive for medium debt-to-asset ratio firms and insignificant for low debt-to-asset ratios, implying that near-all equity firms do not trade at a discount.