Corporate Diversification, Managerial Overexpansion, and Accounting Measures of Firm Performance

Abstract

This study examines the effects of international diversification on the operating and market performance of US multinationals, using foreign fixed assets as a proxy for the degree of international diversification. We measure performance on multiple dimensions: stock price, stock returns, operating income, and operating cash flows. We posit a nonlinear association between diversification and our financial performance measures and test this by conducting two complementary analyses: an initial test based on a linear model and a second test based on a quadratic specification. Our results suggest a negative association in the quadratic model, consistent with prior work that suggests overexpansion of foreign investment decreases operating performance and lowers firm value. Overall, the evidence suggests that the assumed linear dynamics used in prior research appear to be an incomplete tool to describe the relation between firms’ foreign expansion and firm performance.