IDEAS home Printed from https://ideas.repec.org/a/ijb/journl/v18y2019i3p245-263.html
   My bibliography  Save this article

Internationalization and the Cross-section of Stock Returns: Evidence from Multinational Corporations Publicly Listed in the U.K

Author

Listed:
  • Nawar Hashem

    (Department of Banking and Finance, Damascus University, Syria)

  • Larry Su

    (School of Business, University Technology Brunei, Brunei Darussalam)

Abstract

The link between internationalization and firm performance is a key issue in international business research. This paper thus proposes two main opposing channels through which the degree of internationalization affects stock returns for multinational corporations (MNCs). In particular, MNCs can benefit from risk reduction through international diversification, yet may be exposed to more risk factors in international markets. Using a sample of 566 MNCs publicly listed on the London Stock Exchange (LSE) during 1999 and 2015, this paper finds that the degree of internationalization positively and significantly correlates to the cross-section of stock returns in all Fama-MacBeth regressions, even after accounting for beta, size, book-to-market, leverage, momentum, and product market competition. In addition, the interaction term between product market competition and internationalization is significantly negative. The results indicate that firms or industries with a higher degree of internationalization earn, on average, higher risk-adjusted returns, but only in less competitive industries.

Suggested Citation

  • Nawar Hashem & Larry Su, 2019. "Internationalization and the Cross-section of Stock Returns: Evidence from Multinational Corporations Publicly Listed in the U.K," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(3), pages 245-263, December.
    • Handle: RePEc:ijb:journl:v:18:y:2019:i:3:p:245-263
    as

    Download full text from publisher

    File URL: https://ijbe.fcu.edu.tw/assets/ijbe/past_issue/No.18-3/pdf/vol_18-3-1.pdf
    Download Restriction: no
    File URL: https://ijbe.fcu.edu.tw/assets/ijbe/past_issue/No.18-3/abstract/01.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mirela Malin & Madhu Veeraraghavan, 2004. "On the Robustness of the Fama and French Multifactor Model: Evidence from France, Germany, and the United Kingdom," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 3(2), pages 155-176, August.
    2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    3. Bengt Holmström & Jean Tirole, 2001. "LAPM: A Liquidity‐Based Asset Pricing Model," Journal of Finance, American Finance Association, vol. 56(5), pages 1837-1867, October.
    4. Farok J Contractor & Sumit K Kundu & Chin-Chun Hsu, 2003. "A three-stage theory of international expansion: the link between multinationality and performance in the service sector," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 5-18, January.
    5. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    6. David R. Gallagher & Katja Ignatieva & James McCulloch & Henk Berkman, 2015. "Industry concentration, excess returns and innovation in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(2), pages 443-466, June.
    7. Nawar Hashem & Larry Su, 2015. "Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(4), pages 769-785, August.
    8. Fatemi, Ali M, 1984. "Shareholder Benefits from Corporate International Diversification," Journal of Finance, American Finance Association, vol. 39(5), pages 1325-1344, December.
    9. Daniel Sullivan, 1994. "Measuring the Degree of Internationalization of a Firm," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 25(2), pages 325-342, June.
    10. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    11. Shapiro, Alan C., 1978. "Financial Structure and Cost of Capital in the Multinational Corporation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 211-226, June.
    12. Singh, Manohar & Nejadmalayeri, Ali, 2004. "Internationalization, capital structure, and cost of capital: evidence from French corporations," Journal of Multinational Financial Management, Elsevier, vol. 14(2), pages 153-169, April.
    13. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    14. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. "Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
    15. Todd A Burgman, 1996. "An Empirical Examination of Multinational Corporate Capital Structure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(3), pages 553-570, September.
    16. Barber, Brad M & Lyon, John D, 1997. "Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms," Journal of Finance, American Finance Association, vol. 52(2), pages 875-883, June.
    17. Alan Gregory & Rajesh Tharyan & Angela Christidis, 2013. "Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(1-2), pages 172-214, January.
    18. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    19. Kwang Chul Lee & Chuck C Y Kwok, 1988. "Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 19(2), pages 195-217, June.
    20. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    21. Allen Michel & Israel Shaked, 1986. "Multinational Corporations vs Domestic Corporations: Financial Performance and Characteristics," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 17(3), pages 89-100, September.
    22. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    23. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nawar Hashem & Larry Su, 2015. "Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(4), pages 769-785, August.
    2. Chiung-Jung Chen & Chwo-Ming Joseph Yu, 2011. "FDI, Export, and Capital Structure," Management International Review, Springer, vol. 51(3), pages 295-320, June.
    3. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Rationalizing the value premium in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 51-70.
    4. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    5. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    6. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, February.
    7. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, August.
    8. Sawaliya, Priya & Sinha, Pankaj, 2018. "Behaviour of asset pricing models in pre and post-recession period: an evidence from India," MPRA Paper 93084, University Library of Munich, Germany, revised 22 Jan 2019.
    9. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    10. Joachim Freyberger & Andreas Neuhierl & Michael Weber, 2020. "Dissecting Characteristics Nonparametrically," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2326-2377.
    11. Şahin, Baki Cem & Danışoğlu, Seza, 2022. "Ambiguity and asset pricing: An empirical investigation for an emerging market," International Review of Financial Analysis, Elsevier, vol. 84(C).
    12. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    13. Shou-Min Tsao & Guang-Zheng Chen, 2012. "The impact of internationalization on performance and innovation: The moderating effects of ownership concentration," Asia Pacific Journal of Management, Springer, vol. 29(3), pages 617-642, September.
    14. Boubaker, Sabri & Hamza, Taher & Vidal-García, Javier, 2018. "Financial distress and equity returns: A leverage-augmented three-factor model," Research in International Business and Finance, Elsevier, vol. 46(C), pages 1-15.
    15. repec:dau:papers:123456789/2514 is not listed on IDEAS
    16. Zura Kakushadze, 2014. "4-Factor Model for Overnight Returns," Papers 1410.5513, arXiv.org, revised Jun 2015.
    17. Geertsema, Paul & Lu, Helen, 2020. "The correlation structure of anomaly strategies," Journal of Banking & Finance, Elsevier, vol. 119(C).
    18. Ryan Bartens & Shakill Hassan, 2010. "Value, size and momentum portfolios in real time: the cross section of South African stocks," Australian Journal of Management, Australian School of Business, vol. 35(2), pages 181-202, August.
    19. Jiaju Miao & Pawel Polak, 2023. "Online Ensemble of Models for Optimal Predictive Performance with Applications to Sector Rotation Strategy," Papers 2304.09947, arXiv.org.
    20. Ray Ball & Gil Sadka & Ayung Tseng, 2022. "Using accounting earnings and aggregate economic indicators to estimate firm-level systematic risk," Review of Accounting Studies, Springer, vol. 27(2), pages 607-646, June.
    21. Charee Kwak, 2017. "The Effect of Corporate International Diversification on Firm Risk," Discussion Papers 2017-17, Kobe University, Graduate School of Business Administration.

    More about this item

    Keywords

    internationalization; stock returns; multinational corporations; asset pricing; London Stock Exchange;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:18:y:2019:i:3:p:245-263. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Szu-Hsien Ho (email available below). General contact details of provider: https://edirc.repec.org/data/cbfcutw.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.