International Diversification, Excessive Growth, and Corporate Governance

Mengyang Guo,Justin Yiqiang Jin,Mary Li Zhi Ma

doi:10.4236/tel.2019.97157

Abstract

This study examines the relationship between international diversification and firms’ access to external capital to finance growth opportunities. We hypothesize that moral hazards, adverse selection, and home bias arise when firms expand across borders. These problems may hinder the portion of firm growth that is financed by external capital providers known to play a monitoring role. Using various measures of firms’ excessive growth and international diversification, we show that external capital providers do not view the international expansion of operations as value-enhancing activities. We also find that efforts of corporate governance (e.g., through higher levels of corporate governance and the disclosure of segment earnings) can be an effective strategy to alleviate external capital providers’ concerns and achieve higher growth rates through the expansion of international operations.

Highlights

There are more internationally diversified firms today than there were 30 years ago
We examine the portion of actual growth monitored and financed by external capital providers and focus on actual growth achieved through capital funded by external capital providers, who are known to play a monitoring role in corporate decisions
Mixed evidence has been found on the effects of corporate international diversification on capital structure, costs of capital, and firm value [1] [38] [39] [40], our research suggests that external capital providers do not view the international expansion of operations as value-enhancing activities

Summary

Introduction

There are more internationally diversified firms today than there were 30 years ago. It is documented that the percentage of internationally diversified firms in the United States increased significantly in the last decade [1]. Among S&P 500 stock index-listed firms, about 40% of revenues and profits come from foreign markets [2]. A broad stream of literature has investigated the relationship between international diversification and firm performance. Prior studies have provided mixed evidence about the effects of corporate international diversification on capital structure, costs of capital, and firm value.

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Conclusion