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J. of Multi. Fin. Manag. 21 (2011) 55–67

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Journal of Multinational Financial
Management
journal homepage: www.elsevier.com/locate/econbase

Factors in multinational valuations: Transparency, political risk and diversification
NyoNyo A. Kyaw ∗, John Manley, Anand Shetty
Department of Finance, Business Economics and Legal Studies, Hagan School of Business, Iona College, New Rochelle, NY 10801, United States

article

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Article history:
Received 5 August 2010
Accepted 14 December 2010
Available online 21 December 2010
JEL classification:
F37, G30
Keywords:
Multinationals
Valuation
Transparency
Geographic diversification
Political risk

abstract
This paper examines the role of geographic diversification, transparency, and political risk, in the determination of the value of multinational corporations (MNCs). Using alternative measures for geographic diversification, this paper finds the evidence supporting the positive effect of the degree of multinationality on the firm value. The evidence also provides support for the theories that argue that political risk and transparency have negative impact on the MNC value.

Published by Elsevier B.V.

1. Introduction
The factors impacting the performance of multinational firms remain of much interest to managers, investors and researchers. A number of theories have been put forth and tested empirically to link the international expansion with the firm value. The internalization theory (INT) posits the idea that multinational firms can create value by internalizing the markets for key intangible assets of the firm such as marketing, managerial and production skills, patents and goodwill. For example, Malone and Rose (2006) argue that a firm’s unique intangible assets provide a competitive advantage that may be best claimed through geographic expansion. Using transaction cost theory, they argue that man-

∗ Corresponding author at: Department of Finance, Business Economics and Legal Studies, Hagan School of Business, Iona College, 715 North Avenue, New Rochelle, NY 10801, United States. Tel.: +1 914 633 2269; fax: +1 914 633 2012. E-mail addresses: nkyaw@iona.edu (N.A. Kyaw), jmanley@iona.edu (J. Manley), ashetty@iona.edu (A. Shetty). 1042-444X/$ – see front matter. Published by Elsevier B.V. doi:10.1016/j.mulfin.2010.12.007

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N.A. Kyaw et al. / J. of Multi. Fin. Manag. 21 (2011) 55–67

agement skills provide low transaction costs which motivate foreign expansion in search of growth opportunities. Pak and Park (2004) argue that benefits associated with internalization are derived from knowledge, and the value of this knowledge benefit is maximized with international expansion and enhanced with an increasing degree of R&D intensity, international experience, cultural diversity, and political risk.

The multinational network hypothesis (MNH) argues that multinational firms can take advantage of a set of real options on contingent outcomes that cannot be otherwise acquired by investors directly. As such, multinational enterprises are in a position to capitalize on the imperfection in world capital markets, with the possibility of optimizing global tax liabilities and available low-cost inputs, especially in less developed countries (Morck and Yeung, 1991). The higher the level of multinationality, the stronger is their position to capitalize, and the higher the MNC’s level of performance. The MNH also argues that the prime benefits from internationalizing operations are derived from the choices that will be open to the MNC from the expansion. The international scope of the firm’s operations provides options for actions unique to its own characteristics and situation, but otherwise previously not available. For example, opportunities to arbitrage factors of production across borders are a unique and valued option, such as cheaper (as well as easier, more convenient, more accessible) internal financing opportunities for...
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