Internationalization and Firm Risks

Only available on StudyMode
  • Download(s) : 39
  • Published : March 3, 2013
Open Document
Text Preview
Internationalization and Firm Risk: An Upstream-Downstream Hypothesis Author(s): Chuck C. Y. Kwok and David M. Reeb Reviewed work(s): Source: Journal of International Business Studies, Vol. 31, No. 4 (4th Qtr., 2000), pp. 611-629 Published by: Palgrave Macmillan Journals Stable URL: http://www.jstor.org/stable/155664 . Accessed: 20/01/2013 05:04 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

.

Palgrave Macmillan Journals is collaborating with JSTOR to digitize, preserve and extend access to Journal of International Business Studies.

http://www.jstor.org

This content downloaded on Sun, 20 Jan 2013 05:04:54 AM All use subject to JSTOR Terms and Conditions

Internationalization Firm and

Risk:

An

Upstreamr-Downstream Hypothesis
Chuck C. Y. Kwok*
UNIVERSITY OF SOUTH CAROLINA

David M. Reeb**
AMERICAN UNIVERSITY

Corporate international diversification theory posits that multinational corporations (MNCs) should have lower risk and higherfinancial leverage than purely domestic corporations (DCs). We suggest an alternative upstream-downstreamhy-

pothesis according to which the overall effect of internationalization on the risk and leverage of MNCs is expected to vary with home and target market conditions. The empirical results are consistent with the suggested hypothesis. porations (DCs) (e.g. Lee and Kwok, 1988). An implication of this body of research is that firm risk is increasing in corporate internationalization. Owing to data availability, the research on the financial aspects of firm internationalization has focused primarily on US based firms. We explore how internationalization affects risk and leverage for firms based in emerging markets and in other developed markets.1 Specifically, we argue that when firms from more stable economies make international investments, it tends to increase their risk and leads to a reduction in debt usage. By contrast, when firms from less

M

uch of the early literature on the

multinational corporation (MNC) posits a diversification benefit for MNCs, leading to lower levels of risk and to subsequently higher levels of debt. Initial research by scholars such as Hughes, Logue, and Sweeny (1975) finds evidence consistent with the diversification benefit. However, more recent research by Bartov, Bodnar and Kaul (1996) and Reeb, Kwok and Baek (1998) finds that firm risk is positively related to internationalization. Similarly, research on leverage finds that US MNCs have significantly lower levels of debt in their capital structure relative to domestic cor-

*Chuck Kwok is Professor of International Business at the University of South Carolina. He was Vice President-Administration of the Academy of International Business in 1995-96. * *David

Reeb is an Assistant Professor in the Kogod School of Business at American University. His research focuses on the financial aspects of international business.

We would like to thank Andy Chui, three anonymous reviewers, and the participants at the Academy of International Business 1998 Annual Conference in Vienna Austria for their valuable input. Chuck Kwok gratefully acknowledges the support of the Center for International Business Education and Research (CIBER) at the University of South Carolina. JOURNAL OF INTERNATIONALBUSINESS STUDIES,

31, 4

(FOURTH QUARTER

2000): 611-629

611

This content downloaded on Sun, 20 Jan 2013 05:04:54 AM All use subject to JSTOR Terms and Conditions

AND FIRM RISK INTERNATIONALIZATION

stable economies...
tracking img