Cultural Diversity and Value of Multinational Firms

Abstract

This paper examines the influence of cultural diversity on the value of multinational firms. The results show that cultural diversity is negatively associated with firm value. After investigating the underlying channels, we find that the negative valuation effect of cultural diversity is driven mainly by lower cash flows. In contrast, we find insignificant evidence that cultural diversity has effects on discount rates. The negative effect of cultural diversity holds after addressing endogeneity issues. Further, the use of alternative measures of culture, different proxies for firm value and different estimation methods does not change our main result. Moreover, our results are robust when considering agency problems and the global financial crisis. Overall, these findings extend the literature on global diversification and indicate that the valuation discount is, to a certain degree, associated with cultural diversity.