Value Relevance of Multinationality: Evidence from Korean Firms

8/17/2019 Value Relevance of Multinationality: Evidence from Korean Firms

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Value Relevance of Multinationality: Evidencefrom Korean Firms

Sangno LeeCollege of Business Administration, Chonbuk National University, Jeonju, 561756, Koreae-mail: [email protected]

Minho KimCollege of Business Administration, Chonbuk National University, Jeonju, 561756, Koreae-mail: [email protected]

Wallace N. Davidson III Department of Finance, College of Business, Southern Illinois University, Carbondale, IL,60333e-mail: [email protected]

Abstract

The purpose of this study is to examine the valuation effects of multinationality in

Korean firms and to identify the role of multinationality in internalization theory. We

hypothesize that the market positively values the multinational activities of Korean

firms, which are operating in a small open economy in which firms have strong motiva-tions for internationalization. We use Ohlson’s (1995, Contemporary Accounting

Research, 11, 661) value model and document the positive effect for multinational firms

compared to domestic firms, as well as the positive effect of multinationality on firm

value. These results are robust across studies, as indicated by Tobin’s q measure, aswell as across years. We also hypothesize that multinationality mediates or moderates

the relationship between intangibility and firm value that is proposed in internalization

theory. We do not find supporting evidence for a mediated influence of intangibility

through multinationality on firm value nor for a moderated influence of intangibility

on firm value. We find that multinationality and intangibility directly and indepen-

dently influence firm value, without any interference from each other. These results are

also robust across studies, as indicated by Tobin’s q measure. Finally, we find that mul-

tinationality in Korean firms has never lost its importance, even during the global

financial crisis in the year 2008.

1. Introduction

When considering entering overseas markets, corporate managers must

determine whether overseas expansion is likely to result in higher

performance and ultimately in higher firm value. Academically,this question has long been studied among scholars with somewhat

We wish to acknowledge the helpful comments from our two anonymous reviewers.

Journal of International Financial Management & Accounting 26:2 2015

© 2015 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.


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contradictory results. Some studies have reported a positive relationship

between multinationality and firm value (Errunza and Senbet, 1981;

Morck and Yeung, 1991; Doukas, 1995; Bodnar et al., 1997; Gande

et al., 2009; Eckert et al., 2010), whereas others have reported thatinternational expansion tends to reduce firm values (Defusco et al.,

1988; Click and Harrison, 2000; Denis et al., 2002; Kim and Mathur,

2008; Ferris et al., 2010). Previous studies have reported inconsistent

results depending on the theories on which they are based, the measure-

ment methods for multinationality, and the countries studied.

The purpose of this paper is to provide further evidence on this

issue by addressing it in the Korean context, revisiting internalization

theory, and incorporating a longitudinal analysis with a composite

index of multinationality. First, we focus on the role of multinationali-

ty in Korea which experienced a financial crisis in 1997 – 1998 and a

global crisis in 2008 and which is sandwiched between two strong

economies, China and Japan. In the process of reforming its economy

after the two crises, Korea has established export-oriented policies,

overseas manufacturing, and foreign direct investment, which are activ-

ities of multinationality. Operating under a small economy, Korea is

required to reach a certain level of economy of scale through overseas

expansion because the home markets do not provide sufficient groundsfor survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,

2003). Thus, firms have to overcome the liabilities of foreignness and

maintain dynamic capabilities, which are defined as “the firm’s ability

to integrate, build and reconfigure its unique resources to create new

competitive advantages” (Maitland and Nicholas, 2002, p. 7). Given

that the ongoing financial and economic crises have not been

addressed with respect to multinationality during the last few years

(Oesterle and Wolf, 2011) and most extant empirical studies on thistopic have centered on U.S. multinationals (Eckert et al., 2010), a mul-

tinationality study in the Korean context that considers the experi-

enced crises can provide business practitioners with practical insight

regarding the ability of multinationality to be a driver to escape an

economic crisis.

Second, we consider an emerging issue about internalization theory

as it explains the boundaries of organizations (Buckley and Casson,

1976). Internalization theory predicts that firms take on multinational

operations only if the hierarchical model of the organization is efficient

compared to the price systems or markets. Firms will organize domes-

tic or foreign subsidiaries whenever markets operate resources less

112 Sangno Lee, Minho Kim and Wallace N. Davidson III

© 2015 John Wiley & Sons Ltd


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efficiently, such as raw materials, marketing services, and intangible

assets. Thus, internalization theory explains that multinational firms

are organized to bypass inefficient resource markets. Despite the

robustness of the theory, an endogeneity issue of multinationality hasbeen brought up recently (Hennart, 2007; Dastidar, 2009). Dastidar

(2009) argues that firm performance is not a consequence of interna-

tional diversification per se, but is affected by better performing firms

abroad. For example, firms that have highly differentiated products or

intangible assets may choose to go abroad to expand their market and

exploit comparative advantages. Reviewing 40 years of research on

internationalization and firm performance, Glaum and Oesterle (2007)

similarly point out that benefits from internalization simply accrue

from increased sizes of firms, rather than accruing directly from multi-

national diversity; multinationality is a means to expand the size of a

firm. In this study, we examine the role of multinationality to deter-

mine whether it is a determinant, a mediator, or a moderator of intan-

gible assets and performance using structural equation modeling.

Third, we incorporate a longitudinal analysis with a composite

index of multinationality in a valuation model. To estimate the value

of multinationality, we employ Ohlson’s (1995) valuation model, the

validity of which has been successfully demonstrated in many account-ing and finance empirical studies (Collins et al., 1998; Francis et al.,

2000; among others). The model expresses the value of the firm as a

function of net assets, accounting profits and other information related

to firm value. Multinationality is included in the model as “other

information” along with control variables such as firm size. In measur-

ing multinationality, we explicitly recognize Sullivan’s (1994) sugges-

tion to use composite index measures instead of single-item measures.

Sullivan argues that single-item measures, such as the ratio of a firm’sforeign sales to total sales (or foreign assets to total assets), do not

appropriately capture the multidimensionality of internationalization.

Also, we address the endogeneity or self-selection issue that the impact

of multinationality may be a result of better performing firms expand-

ing abroad (Dastidar, 2009; Gande et al., 2009). Firms that choose to

diversify are more likely to have higher values. Consequently, Campa

and Kedia (2002) argue that any examination of the relationship

between multinationality and firm value is incomplete without taking

self-selection into account.

We study the manufacturing firms listed in the Korea Stock

Exchange over the 7 years from 2003 to 2009 and identify positive

Value Relevance of Multinationality 113



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incremental valuation effects of multinationality. The results are robust

over the years even for the period of global financial crisis when the

valuation effect is supposed to be decreased remarkably. We also find

that most of the positive relationships are derived from firms with highlevels of multinationality. The rest of this paper is organized as fol-

lows: The next section describes the theoretical background and

hypotheses of this study. Section 3 explains the estimation model, mea-

surement of multinationality, and data. Section 4 presents the empiri-

cal results, and the final section provides conclusions for the paper.

2. Theoretical Background and Hypotheses Development

2.1. Three Theories of Multinationality

Some theories predict positive relationships for the link between multi-

nationality and firm value, while others predict negative relationships;

each theory provides conditions under which its arguments hold. For

example, internalization theory predicts that multinationality enhances

the value of a firm by developing new markets for its intangible assets,

such as superior R&D and marketing capabilities, managerial and

production skills, and consumer goodwill.1 These proprietary intangi-ble assets are firm-specific advantages that cannot easily be copied or

exchanged but can be transferred to subsidiaries. Therefore, a firm

tries to maintain its competitive advantages over other firms by inter-

nalizing its foreign market activities in the form of direct investments.

An implication is that the value of a multinational firm with superior

intangible assets will increase by the degree of its foreign involvement.

Several empirical studies support the notion of internalization theory,

often using R&D and advertising expenditure as proxies of intangibleassets (Morck and Yeung, 1991; Gande et al., 2009).

Some theorists assert that imperfections in global capital markets

may enhance the value of multinationals.2 Investors may find it diffi-

cult to optimally diversify their portfolios internationally due to such

barriers as institutional restrictions on overseas capital flows and infor-

mation asymmetries. Therefore, multinationals provide investors with

better international diversification opportunities via their foreign direct

investments, which are expected to enhance the values of multination-

als in their home country relative to purely domestic firms. Although

there is empirical evidence to support the argument (Errunza and Sen-

bet, 1981, 1984; Kim and Lyn, 1986), investors may already be able to




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reap the benefits of international diversification if capital markets are

sufficiently integrated (Alder and Dumas, 1983). In this case, diversifi-

cation at a firm level has little value to the investors.

Managerial objective theory predicts that multinationality wouldhamper the firm. Managers, whose objective is to maximize their own

self-interest, do not always act in the best interest of shareholders, that

is, to maximize the value of their shares. In this situation, an agency

cost occurs. Multinationality would inevitably lead to more complex

corporate structures with many foreign subsidiaries, which makes it

more difficult for shareholders to monitor managerial decisions.3 This

gives the managers of such firms more opportunities to act in their

own self-interest, at the expense of shareholders. Moreover, managers

may seek overseas expansion even though it is not profitable to the

firm because they may reap higher salary, power, and prestige as the

firm grows in size. Therefore, differences in objectives between manag-

ers and shareholders can reduce the value of multinationals. Some

empirical studies support the tenets of this theory (Mishra and Gobeli,

1998; Click and Harrison, 2000; Denis et al., 2002; Kim and Mathur,

2008).

Country of origin is a recent additional factor for theoretical and

empirical developments in the context of multinationality-valuerelationships (and multinationality-performance relationships, as well).

Olsen and Elango (2005) report reductions in firm value with multina-

tional operations made by U.S. firms and increases in value for the

Continental European and Japanese firms, indicating that the market

valuation effect may differ on the basis of the environment in which

the firm is based. They interpret this as indicating that U.S. investors

do not value the additional cost, complexity, and risk induced by the

multinational activities of U.S. firms, because of their large domesticmarket. Eckert et al. (2010) also argue that, in terms of the multina-

tionality-value relationship, the U.S. firms may be a very special case

due to the size of their home market, and they report evidence of value

enhancement of German firms from their multinational activities.4

2.2. The Multinationality of Non-U.S. Firms

Three theories for multinationality, including internalization theory,

imperfection market theory, and managerial objective theory, have

been applied to U.S. multinational firms, and these theories have been

used for explicating the effects of multinationality; that is, while the




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first two theories support a positive relationship with firm perfor-

mance, the last theory supports a negative relationship. More recently,

researchers note overseas activities of firms based in Europe and Asia

and investigate the impact of multinationality of firms in these twocontinents. Study findings regarding multinationality for non-U.S. and

Korean firms are summarized in Table 1.

In a multivariate analysis using 35 countries’ data and excluding the

United States, Ferris et al. (2010) find that global diversification has

no significant relationship with excess value of firms. In the studies of

European firms, Olsen and Elango (2005) and Eckert et al. (2010) sup-

port a global diversification premium, while Capar and Kotabe (2003)

partially support a positive effect with a U-shaped relationship with

return on sales. On the other hand, in the studies of Asian firms, Pan

et al. (2010) find that global or country diversification has a negative

association with performance, but regional diversification has an

inverted U-shaped relationship with performance. For Japanese multi-

national firms, Goerzen and Beamish (2003) support a positive associa-

tion with firm performance, and Lu and Beamish (2001) support a

U-shaped relationship. In the studies of India and Taiwan, Chiang and

Yu (2005) and Pattnaik and Elango (2009) find an inverted S-shaped

relationship between multinationality and performance. Kim (2009)measures multinationality as the number of countries and subsidiaries

as well as foreign sales and supports a U-shaped relationship with the

former measure, but an inverted S-shaped relationship with the latter

measure. Studies on non-U.S. firms indicate that the effects of multina-

tionality are inconclusive according to not only measures of firm

performance and multinationality but also different countries.

2.3. The Multinationality of Korean Firms

Studies on multinationality have centered on the United States and

developed countries, and few studies have paid attention to small

countries such as Korea (Kim, 2009) and Taiwan (Chiang and Yu,

2005). Compared to other countries, Korea has three unique character-

istics for multinationality. First, Korea has successfully transformed its

economy and achieved economic growth in a short period. In the pro-

cess of transforming into a developed economy, its primary instrumen-

tal means has been exports, foreign direct investment, and overseas

manufacturing, and the Korean government has employed these

approaches to lead Korea’s export-oriented policies (Ahn et al., 2005;




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T a b l e 1 .

S t u d i e s o n M u l t i n a t i o n a l i t y o f N o n - U . S . F i r m s

C o u n t r i e s

A u t h o r ( s ) a n d y

e a r

F i r m p e r f o r m a n c e

M u l t i n a t i o n a l i t y

E m p i r i c a l fi n d i n g s

3 5 C o u n t r i e s

F e r r i s e t a l .

( 2 0 1 0 )

E x c e s s v a l u e

a n d T o b i n ’ s q

S e g m e n t s o f b u s i n e s s

o p e r a t i o n s

I n d u s t r i a l d i v e r s i fi c a

t i o n a l o n e

h a s a n e g a t i v e r e l a t i o n s h i p ;

g l o b a l d i v e r s i fi c a t i o

n a l o n e

h a s n o s i g n i fi c a n t r

e l a t i o n s h i p ;

a n d i n d u s t r i a l a n d

g l o b a l

d i v e r s i fi c a t i o n e a c h

h a s a

n e g a t i v e r e l a t i o n s h i p

U n i t e d S t a

t e s ,

E u r o p e , a

n d

J a p a n

O l s e n a n d E l a n g o

( 2 0 0 5 )

T o b i n ’ s q

A c o m p o s i t e i n d e x

u s i n g f o r e i g n s a l e s

r a t i o ,

f o r e i g n a s s e t s

r a t i o ,

a n d f o r e i g n

e m p l o y m e n t r a t i o

U . S .

fi r m s f a c e m u l t i n a t i o n a l

d i s c o u n t s ,

b u t E u r o p e a n d

J a p a n s h o w m u l t i n

a t i o n a l

p r e m i u m s

U n i t e d

K i n g d o m

G a r r o d a n d R e e s

( 1 9 9 8 )

S t o c k p r i c e

F o r e i g n a s s e t s a n d

f o r e i g n p r o fi t s

T h e r e i s v a l u a t i o n d

i ff e r e n c e

b e t w e e n d o m e s t i c a n d

m u l t i n a t i o n a l fi r m s

G e r m a n y

E c k e r t e t a l .

( 2 0 1 0

)

T o b i n ’ s q

F o r e i g n s a l e s t o t o t a l

s a l e s a n d f o r e i g n

a s s e t s ,

a n d t o t o t a l

a s s e t s

A p o s i t i v e r e l a t i o n s h i p

G e r m a n y

C a p a r a n d K o t a b e

( 2 0 0 3 )

R O S

F o r e i g n s a l e s r a t i o

A U - s

h a p e d c u r v i l i n

e a r

r e l a t i o n s h i p

I t a l y

M a j o c c h i e t a l .

( 2 0 0 5 )

E x p o r t i n g

F i r m s i z e a n d a g e

F i r m s i z e a n d a g e h a v e a

p o s i t i v e r e l a t i o n s h i p w i t h

e x p o r t i n g i n t e n s i t y

C h i n a

P a n g a r k a r a n d W u

( 2 0 1 2 )

R O A

I n d u s t r y g l o b a l i z a t i o n

A p o s i t i v e r e l a t i o n s h i p




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T a b l e 1 ( C o n t i n u e d )

C o u n t r i e s

A u t h o r ( s ) a n d y

e a r

F i r m p e r f o r m a n c e


E m p i r i c a l fi n d i n g s

C h i n a

P a n e t a l .

( 2 0 1 0 )

R O E

C o u n t r y d i v e r s i fi c a t i o n

( f o r e i g n s a l e s ) a n d

r e g i o n a l d i v e r s i fi c a t i o

n

( e n t r o p y m e a s u r e )

F o r c o u n t r y d i v e r s i fi

c a t i o n ,

t h e y fi n d a n e g a t i v e

r e l a t i o n s h i p w i t h

p e r f o r m a n c e ,

a n d f

o r

r e g i o n a l d i v e r s i fi c a t i o n ,

t h e y

fi n d a n i n v e r t e d U - s

h a p e d

r e l a t i o n s h i p

J a p a n

G o e r z e n a n d

B e a m i s h ( 2 0 0 3 )

S h a r p e m e a s u r e ,

J e n s e n ’ s a l p h a ,

a n d m a r k e t - t o -

b o o k r a t i o

I n t e r n a t i o n a l a s s e t

d i s p e r s i o n a n d

c o u n t r y e n v i r o n m e n t

d i v e r s i t y

A p o s i t i v e r e l a t i o n w

i t h

i n t e r n a t i o n a l d i s p e r s i o n ,

b u t

a n e g a t i v e a s s o c i a t i o n w i t h

c o u n t r y e n v i r o n m e n t d i v e r s i t y

J a p a n

L u a n d B e a m i s h

( 2 0 0 1 )

R O A a n d R O S

F o r e i g n d i r e c t

i n v e s t m e n t

A U - c u r v e r e l a t i o n s h i p

J a p a n

J i n j i e t a l .

( 2 0 1 1 )

F o r e i g n d i r e c t

i n v e s t m e n t

T o b i n ’ s q

F i r m s h a v i n g h i g h e r

T o b i n ’ s q

t e n d t o c h o o s e m o r e F D I

I n d i a

P a t t n a i k a n d

E l a n g o ( 2 0 0 9 )

R O E

A fi r m ’ s r e v e n u e f r o m

f o r e i g n c o u n t r i e s

A n i n v e r t e d S - s

h a p e

d

r e l a t i o n s h i p b e t w e e

n

i n t e r n a t i o n a l i z a t i o n

a n d R O E

T a i w a n

C h i a n g a n d Y u

( 2 0 0 5 )

R O E

F o r e i g n a s s e t s

A n i n v e r t e d S - s

h a p e

d

r e l a t i o n s h i p b e t w e e

n

m u l t i n a t i o n a l i t y a n

d

p e r f o r m a n c e

K o r e a

K i m ( 2 0 0 9 )

R O A

N u m b e r o f c o u n t r i e s

a n d s u b s i d i a r i e s ,

f o r e i g n s a l e s

A U - s

h a p e d r e l a t i o n

s h i p

w i t h t h e n u m b e r o f c o u n t r i e s

a n d s u b s i d i a r i e s ; i n

v e r t e d

S - s

h a p e d r e l a t i o n s h

i p w i t h

f o r e i g n s a l e s

N o t e : R O A

, r e t u r n o n a s s e t s ; R O S ,

r e t u r n

o n s a l e s ; R O E ,

r e t u r n o n e q u i t y .




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Kim and Lee, 2007; Siegel, 2007). As a result, many Korean firms have

organized foreign subsidiaries and increased foreign business activities.

In particular, a form of business conglomerate called Chaebols, such as

Samsung and Hyundai, has become global multinationals throughfirm-specific advantages, which are unique capabilities proprietary

to the organization (Rugman and Oh, 2008). The adoption of market-

oriented economic policies by the Korean government and severe

competition in domestic markets have led Korean firms to engage

in international markets for their new growth opportunities. Thus,

compared to developed countries like Japan that reached high level of

multinationality due to active horizontal and vertical foreign direct

investments (Ahn et al., 2005), Korean firms have grown from small

companies with low levels of multinationality to Chaebols with high

levels of multinationality, allowing researchers to investigate the effects

of multinationality in an emerging market.

A second unique characteristic of Korean firms regarding multina-

tionality is that Korea experienced a turbulent currency crisis in 1997

and 1998 and a global financial crisis in 2008, and many firms went

bankrupt during this period. In particular, after the currency crisis,

Korean firms had considerable productivity growth because they

employed efficiency-oriented strategies, and the export-oriented firmsachieved more growth than the domestic firms (Rhee and Pyo, 2010).

Ahn et al. (2005) find that internationalization has a positive associa-

tion with productivity growth. Thus, Korea’s diverse economic envi-

ronment may reveal the important effects of multinationality well.

Third, Korea is sandwiched between two large countries, China and

Japan. China has achieved fast economic growth and enhanced techno-

logical competitiveness based on low costs of production and expanded

market opportunities. Japan is the world’s third largest economy afterthe United States and China and leads technology innovation and

produces important electronic components (Kwon and Chun, 2008).

Chinese firms are likely to catch up with Korean firms because they

have rich resources of labor and materials. On the other hand, because

of high gaps in technology levels between Korea and Japan, Korean

firms have continued to rely on technologies and components of

machineries from Japan. In this situation, Korea has attempted to

improve the competitiveness of manufacturing firms through exporting

(Choi et al., 2010). In light of these contexts, we argue that Korea

could be a definitive situation to test the impact of multinationality.




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2.4. Studies on Multinationality in Korea

Studies on multinationality in Korea have focused on motivations or

determinants for multinationality, assuming a positive relationship

between multinationality and performance. Rugman and Oh (2008)

find that Korean firms have motivations for multinationality, not for

exploiting country-specific advantages such as cheap and skilled labor

and government subsidies, but for exploiting firm-specific advantages

obtained by expanding research and development capacity and

advanced knowledge and skills. Korean firms consider physical dis-

tance (Erramilli et al., 1999), investment incentives, and trade barriers

(Kwon, 2002) when selecting target countries for foreign direct invest-

ment. It is only lately that the relationship between multinationalityand performance of Korean firms has drawn attention from research-

ers. For example, examining 231 firms from 2003 to 2005, Kim (2009)

finds that multinationality has a U-shaped relationship with firm per-

formance. One possible reason for the scarcity of multinationality

studies in Korea, we believe, is that there are few available databases

that record firms’ foreign business activities, such as foreign subsidiar-

ies and national and foreign sales.

Firms in small open economies, such as Korea and Singapore(Ahmed and Park, 1994; Moon et al., 1998), are forced to be inter-

national players early in their lifetimes and are required to reach a

certain degree of economy of scale through overseas expansion

because their home markets do not provide sufficient grounds for

survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,

2003). Thus, such firms are apt to overcome the liabilities of for-

eignness and to maintain their dynamic capabilities, defined as “the

firm’s ability to integrate, build and reconfigure its unique resources

to create new competitive advantages” (Maitland and Nicholas,

2002, p. 7). Accordingly, the market values overseas expansion per-

formed by firms originating in small open economies, despite the

associated additional costs and risks (Eckert et al., 2010). Also,

firms with lower levels of multinationality may not create more ben-

efits than costs through internationalization, because of huge initial

costs, while those with higher levels of multinationality may obtain

improved economy of scale, and thus the benefits of internationali-

zation would surpass the additional costs. Based on this line of argument, we propose the following hypothesis.




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H1: The multinational activities of Korean firms operating in a small open

economy are positively valued.

2.5. Reconsideration of Internalization Theory

A multinational firm is defined as a firm that owns and controls busi-

ness activities in two or more countries (Buckley and Casson, 2009).

Internalization theory explains that the boundaries of organizations

(Coase, 1937) are set where the benefits from multinational operations

are just offset by their costs. Multinational firms internalize business

activities that previously depended on price systems of markets if they

can maximize profits by putting such business activities under theircontrol. Firms will organize domestic or foreign subsidiaries whenever

markets provide resources less efficiently, such as raw materials, man-

agement services, and intangible assets. Thus, internalization theory

explains that multinational firms are organized to bypass inefficient

markets of resources, and this theory has been successfully applied to

multinational business activities (Buckley and Casson, 2009). Despite

the robustness of the theory, some researchers raise an issue about the

endogeneity of multinationality (Glaum and Oesterle, 2007; Hennart,2007; Dastidar, 2009). Dastidar (2009) argues that the higher firm per-

formance is not a consequence of international diversification, but is

rather caused by the fact that better performing firms expand abroad.

In other words, firms that have highly differential products and intan-

gible assets are likely to choose to go abroad to expand markets and

exploit opportunities. This was pointed out in a review of 40 years of

studies on internationalization and firm performance, conducted by

Glaum and Oesterle (2007) who observe that benefits simply accruefrom increased firm size rather than specifically from international

diversification. Hennart (2007) argues that firms that invest heavily in

intangible assets tend to exploit them through multinational opera-

tions. Thus, it is necessary to separate multinationality from intangi-

bles to understand effects on firm performance. Based on these

arguments, we propose the following hypothesis on the role of multi-

nationality.

H2: Multinationality mediates the relationship between firms’ intangibles

and their performance.




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3. Research Design

3.1. Research Model

We recognize that many prior studies have discussed valuation issuesbased on accounting-centric performance measures, such as return of

assets and return of sales, which are summarized in Table 2, but few

studies have dealt directly with the question of valuation. Accounting

performance measures, including firm profitability, sales growth, and

profit growth and margin, are based on the underlying assumptions

that profitability measures represent firms’ ability to generate earnings

and growth measures are visible and interpretable variables with little

influence by accounting principles. However, such measures are simply

one type of measures of firm performance and do not represent the

value of a firm regarding how much investors would pay to buy the

firm. In contrast, the stock market-centric measures represent the value

of a firm in terms of its equity price, which is what investors care

about (Christophe and Lee, 2005). Stock market-centric measures posit

that all business activities and the value of firms’ assets are ultimately

reflected in stock prices; this theory is supported by Fama’s (1970)

efficient market hypothesis.

The valuation model used in this study is based on Ohlson’s (1995)valuation model, which expresses an equity price as a function of cur-

rent book value per share, earnings per share, and other information.

Although Tobin’s q, the ratio of the market value of a firm’s assets to

the replacement cost of the firms’ assets, can be used as a stock market

measure, we prefer Ohlson’s valuation model because it provides two

further advantages. First, it is a valuation model that explains the rela-

tionship between a stock price and two explanatory variables (book

value per share and earnings per share). Other performance measures,such as return on assets (ROA) and return on sales (ROS), are just

dependent variables, not a model, making models using such perfor-

mance measures likely to be biased or misspecified. Many prior studies

have verified the validity of Ohlson’s model empirically (Myers, 1999;

Lo and Lyx, 2000; Morel, 2003). Additionally, the model measures

market value of a firm, like Tobin’s q, for reflecting the effects of

intangible assets as well as long-term effects of business activities.

Ohlson’s (1995) model is drawn from strict assumptions and deduc-

tive methods rather than from an empirical test. We use an empirical

version of Ohlson’s model that incorporates an intercept variable and




13/39

supposes a non-unity coefficient of book value per share (Myers, 1999;

Lo and Lyx, 2000). That is,

Priceitþ1 ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageit þ eit ð1Þ

where Priceit + 1 = equity price of a firm i at t + 1, BPS it = book

value per share of a firm i at t, EPS it = earnings per share of a firm i

at t, Sizeit = log sales of a firm i at t, Leverageit = total debt/total

assets of a firm i at t and eit = error term.

In the equation (1), the equity price at t + 1 is the stock price at

the end day of 3 months after the end of the fiscal year. Because stock

price of a firm reflects its earnings information through earning

announcement generally, lead values for stock price relative to inde-

pendent variables are employed in the equation. Financial statementsare generally produced and released after 2 or 3 months later from a

Table 2. The Firm Performance Measures and Their Rationale

Performancemeasures Rationale Studies

Firm profitabilitywith ROA and ROS

A class of financialmetrics has used toaccess a business’s abilityto generate earnings,compared to its expensesand other relevant costsincurred during a specificperiod of time

Weill and Vitale (2002)and Mackey (2008)

Sales growth Sales growth is the mostvisible and interpretablevariable with little influence

of accounting principles

Jarvenpaa and Ives (1990)

Profit growth andprofit margin

Growth without profitabilityis not sustainable

O’Sullivan andAbela (2007)

Tobin’s q Tobin’s q is forward-lookingand risk-adjusted. The measurecan consider not only a firm’slong-term performance butalso the value of intangible assets

Ravichandranet al. (2009)

Ohlson’s valuationmodel

This is a model rather than a justperformance measure. The powerof explanation has been

tested in many previous studies

Garrod and Rees (1998)




14/39

fiscal year, so the time is required for the information to be reflected in

stock price.5

Based on the equation (1), we develop several models to test our

two hypotheses. To test Hypothesis 1, we include multinationalityindex (MI ) and a binary variable to indicate a multinational or

domestic firm (MULTI ). MULTI is used to measure the difference in

effects between multinational firms and domestic firms, and MI is

used to measure the effect of multinationality within multinational

firms. Also, because our data are panel data, that is, time series and

cross-sectional data, we incorporate heterogeneity between firms and

serial correlations between years using a generalized linear mixed-

effects model (Fitzmaurice et al., 2004; Wooldridge, 2010). In a gener-

alized linear mixed-effects model, the stock price for the i firm at the

t year is assumed to differ from the population mean by a firm-spe-

cific effect (the fixed effects) and a within-firm measurement error (the

random effects). The within-firm measurement errors are indepen-

dently normally distributed with zero mean and constant variance.

Thus, the vector of regression parameters, b, describes how the mean

stock prices relate to covariates on average, and the vector of firm-

specific regression coefficients, a, describes how the trajectory of stock

price of i firm deviates from the overall population trend in thefollowing model.6 That is,

Priceitþ1 ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ b5MULTI þ b6MI þ ai þ eit ð2Þ

where MULTI = multinational or domestic firm (multinational = 1

and domestic = 0), MI = multinationality index, and ai = mixed effects

(random effects or fixed effects).

The variable, ai, is to control for individual firm heterogeneity

with a random effect model or a fixed effect model. The crucial dif-

ference between two models is whether individual firm effects are

related with other independent variables. A random effect model

assumes that individual effects are uncorrelated with the independent

variables, but a fixed effect model assumes that they are correlated

with the independent variables. Hausman (1978) proposes a test

based on the difference of estimates of two models that if individualeffects are correlated with the independent variables, the difference

between them should be statistically significant. If a random effect




15/39

model is appropriate in estimating the equation (2), the variance

structure will be composed of a random component of ra

and a

measurement component re. The correlation between years is mod-

eled with a random component of ra.To test Hypothesis 2, we include an intangible assets variable

(INTAN ) which combines two variables — research and development

and advertisement expenditures to total assets. Then, we establish the

following four models to test the role of multinationality as a direct

effect, a direct mediated effect, an indirect mediated effect, and a

moderated effect.

MI ¼ b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageit

þ b5INTAN þ ai þ eit ð3aÞ

Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ

b5INTAN þ ai þ eit ð3bÞ

Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþ

b5INTAN þ b6MI þ ai þ eit ð3cÞ

Priceitþ1 ¼b0 þ b1BPS it þ b2EPS it þ b3Sizeit þ b4Leverageitþb5INTAN þ b6MI þ b7MI INTAN þ ai þ eit ð3dÞ

3.2. Measurement of Multinationality

Multinationality has been measured in various ways in extant empiri-

cal studies, and this may be one of the reasons for the inconsistent

results (Annavarjula and Beldona, 2000; Kim, 2009). The majority of studies have used a single-item measure, such as ratio of foreign sales

to total sales (FSTS ) or ratio of foreign assets to total assets (FATA),

to assess multinationality. Sullivan (1994) notes that, although FSTS

(or FATA) objectively measures multinationality and thus is easy to

replicate, it represents only a limited portion of the multinational phe-

nomenon. Sullivan also points out that some conceptually irrelevant

factors, such as random shock in currency rates, may artificially inflate

or deflate a firm’s foreign sales, degrading the meaningfulness of

FSTS .

Instead, Sullivan (1994) has suggested using a composite index

composed of several single-item measures, including a performance




16/39

measure (FSTS ), structural measures (FATA and the ratio of foreign

subsidiaries to total subsidiaries), and attitudinal measures (the over-

seas experience of top management and the psychic dispersion of the

countries in which the firm operates). Although this type of compositeindex has been criticized as lacking a theoretical background (Anna-

varjula and Beldona, 2000) and content validity (Ramaswamy et al.,

1996), it is technically more reliable and inclusive for measuring the

multidimensionality of multinational firms (Li, 2007).

We have composed a Sullivan-type composite index with four single-

item measures: FSTS , FATA, the number of overseas subsidiaries (SUB),

and the number of countries (NAT ) in which the subsidiaries operate. The

number of countries is included because it is possible for some firms to

have multiple subsidiaries concentrated in one or two countries, which

may cause a bias in estimating the true nature of their multinationality.

The numbers of subsidiaries and nations are converted into ratios

using a method that is consistent with that of Sanders and Carpenter

(1998), as follows. Each subsidiary is divided by the maximum number

of subsidiaries in each year’s sample; the result ranges from 0 to 1,

with 1 representing the firm with the largest number of foreign subsidi-

aries in a specific year. The same rule is applied to the nations, with 1

representing the firm with the largest number of countries in which itsforeign subsidiaries operate. To design a composite MI , the converted

ratios of subsidiaries (SUB) and nations (NAT ) are added to the FSTS

and FATA, which can be expressed as follows:

MI ¼ FSTS þ FATA þ SUB þ NAT

where FSTS = foreign sales/total sales, FATA = foreign assets/total

assets, SUB = subsidiaries/maximum number of subsidiaries in eachyear’s sample, and NAT = nations/maximum number of nations in

which subsidiaries operate in each year’s sample.

The maximum value of MI is 4, which represents a firm with maxi-

mum multinationality. We compare the results using this composite

index with those using each measure, to demonstrate how the results

of previous single-item studies might be biased.

3.3. Data

The sample in this study includes all manufacturing firms listed in the

Korea Stock Exchange from 2003 to 2009. Their share prices, book




17/39

values of net assets per share, earnings per share, total assets, total

debt, research and development, advertisement, foreign sales, and

foreign assets are obtained from the KisValue, a database of listed

Korean firms. Only firms with December fiscal year end are includedin the sample. The share prices are those at the end of March of the

following year because the share prices of t + 1 based on Ohlson’s

model (equation 1) were included in the analysis. For example, for the

year 2009, the share prices are those at the end of March 2010. The

number of foreign subsidiaries and countries in which the subsidiar-

ies operate is obtained from the footnotes of the firms’ consolidated

financial statements that present the status of their consolidated

subsidiaries. International Financial Reporting Standards (IFRS) allow

firms to report the status of consolidated subsidiaries if the firms have

significant influence or control of the investee companies (Kieso et al.,

2011, pp. 893-900). We collect the national information of subsidiaries

from the consolidated financial statement if firms report the informa-

tion and glean it from the homepages of firms, otherwise. The sample

period covers 7 years, 2003 – 2009, inclusive, for 633 manufacturing

firms.

We, then, examine multinational firms using the criteria of foreign

sales, assets, subsidiaries, and nations. If a firm has nonzero values inall four variables (FSTS , FATA, SUB, and NAT ), and if its FSTS is

greater than 10 per cent (Denis et al., 2002; Eckert et al., 2010), we

classify it as a multinational firm. Otherwise, we classify it as a domes-

tic firm. Of the 633 manufacturing firms, we obtain 265 multinational

firms. Hypothesis 1 includes the comparison of multinationality effects

between domestic firms and multinational firms. However, the simple

comparison of multinational firms with domestic firms could lead to

selection bias (Heckman, 1979) because the sample size of the domes-tic firms is greater than that of the multinational firms. To control

selection bias in a sample matching method, we select the domestic

firms corresponding to the multinational firms using the propensity

score method with a probit model (Heckman, 1979; Dastidar, 2009).

That is,

Prðmulti ¼ 1Þ ¼ UðX 0bÞ; ð4Þ

where Pr is probability, Φ is a normal cumulative distribution func-

tion, b is a coefficient, and X is BPS , EPS , industry of firms, and total

assets. When matching a domestic firm to a multinational firm, we first




18/39

apply industry and year criteria and then find the domestic firms with

the closest propensity score to that of the multinational firms. By

applying this rule, we obtain 393 domestic firms with 1,295 firm-year

observations that correspond to 265 multinational firms with 1,295firm-year observations. The sample size of domestic firms is larger than

that of multinational firms because the matching of samples is con-

ducted by industry first and by year second. Also, because firms could

be classified as domestic firms before they had become multinational

firms, the total number of firms is 552, not 658,7 but with the same

2,590 firm-year observations.8

4. Empirical Results

4.1. Descriptive Statistics and Correlations

Table 3 provides the descriptive statistics of the variables for the full

sample and for the domestic and multinational samples. The average

price per share in the full, domestic, and multinational samples are

32,355, 30,758, and 33,952 won (1$ = 1,090 won9 ), respectively, and

so, the average price per share in the multinational sample is greater

than that in the domestic sample. The average BPS values of thefull, domestic, and multinational sample are 33,764, 33,410, and

34,118, respectively, and so, the average BPS of the multinational

sample is greater than that of the domestic sample. This trend holds

for EPS , firm size, and leverage variables, with the multinational

sample showing greater values than the domestic sample. The

average value of intangibility, measured by research and develop-

ment and advertisement, is reversed, with the domestic sample

having twice as much as the multinational sample: 0.11 and 0.05,respectively.

MI is only observed in the multinational sample, and its average

value is 0.83 with minimum of 0.13 and maximum of 2.74. The FSTS

variable reveals that Korean-listed manufacturing firms generate an

average of 56 per cent of their sales from overseas locations during

our sample period of 2003 to 2009. It also shows that some firms

generate almost all of their sales (99 per cent) from outside Korea.

The range of FSTS starts around 10 per cent because of the restriction

criteria we imposed on the data. FATA shows that firms in the multi-

national sample possess on average 12 per cent of foreign assets, while




19/39

the maximum figure is 99 per cent. The average values of SUB and

NAT are 0.05 and 0.09, respectively.

Table 4 presents the correlation coefficients for the set of variables

used in the model estimation. The dependent variable Price is highly

correlated with both BPS and EPS , as predicted in the Ohlson’s

model. As expected, firm size and intangibility have positive relation-

ships with Price, and Leverage has a negative relationship with Price.

Price has positive relationships with SUB and NAT , but negativerelationships with FSTS and FATA, revealing the possibility that each

single-item measure has a different effect on the firm value. Also, Price

Table 3. Descriptive Statistics

Variable Mean SD Min Max

Full Sample (2,590)Price 32355.44 94541.57 101.00 1319000.00BPS 33764.46 104731.34 18536.18 1704376.69EPS 2675.86 13499.54 278699.00 407015.00Firm size 26.36 1.62 20.47 32.12Leverage 44.04 20.06 0.99 214.07Intangibility 0.08 0.15 0.00 1.15

Domestic sample (1,295)Price 30758.44 104631.13 130.00 1319000.00BPS 33410.45 106689.27 1725.46 1704376.69EPS 2622.44 8790.65 27845.00 177163.00Firm size 25.72 1.19 20.79 30.07

Leverage 40.27 19.95 0.99 214.07Intangibility 0.11 0.18 0.00 1.12

Multinational sample (1,295)Price 33952.44 83248.69 101.00 900000.00BPS 34118.46 102568.10 18536.18 1509451.82EPS 2729.49 16950.95 278699.00 407015.00Firm size 27.00 1.74 20.47 32.12Leverage 47.80 19.46 1.23 118.09Intangibility 0.05 0.09 0.00 1.15MI 0.83 0.41 0.13 2.74FSTS 0.56 0.25 0.10 0.99

FATA 0.12 0.13 0.00 0.99SUB 0.05 0.10 0.00 1.00NAT 0.09 0.12 0.02 1.00

Notes: Price = Price per share at the end of the following March; BPS = book value pershare; EPS = earnings per share; Firm size = log sales; Leverage = (debt/total assets) 9 100;Intangibility = (R&D/Total assets)/max [each year (R&D/Total assets)] + (Advertisement/Total assets)/max [each year (Advertisement/Total assets)]; FSTS = (foreign sales/total sales)/max [each year (foreign sales/total sales)]; FATA = (foreign assets/total assets)/max [eachyear (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries);NAT = #nations/max (each year #nations); and MI = FSTS + FATA + SUB + NAT .




20/39

T a b l e 4 .

C o r r e l a t i o n s B e t w e e n t h e

V a r i a b l e s

V a r i a b l e s

1

2

3

4

5

6

7

8

9

1 0

1 1

1 . P r i c e

1

2 . B P S

0 . 8 7 6 * * *

1

3 . E P S

0 . 7 3 2 * * *

0 . 6 9 8 * *

*

1

4 . F i r m s i z e

0 . 5 5 7 * * *

0 . 4 5 4 * *

*

0 . 4 0 0 * * *

1

5 . L e v e r a g e

0 . 1 4 7 * * *

0 . 2 5 7 * *

*

0 . 2 5 6 * * *

0 . 2 8 1 * * *

1

6 . I n t a n g i b i l i t y

0 . 1 1 8 * * *

0 . 0 0 4

0 . 1 0 5 * * *

0 . 0 2 0

0 . 1 2 6 * * *

1

7 . M I

0 . 0 3 7

0 . 1 2 1 * *

*

0 . 0 8 0 * *

0 . 2 0 4 * * *

0 . 1 7 0 * * *

0 . 1 7 0 * * *

1

8 . F S T S

0 . 0 6 0 * *

0 . 1 0 5 * *

*

0 . 0 8 9 * * *

0 . 0 4 0

0 . 0 8 5 * *

0 . 2 0 5 * * *

0 . 8 7

7 * * *

1

9 . F A T A

0 . 3 2 3 *

0 . 4 0 5 * *

*

0 . 2 6 5 * *

0 . 1 9 0 * * *

0 . 0 7 4 * *

0 . 1 4 2 * * *

0 . 5 7

4 * * *

0 . 4 9 1 * * *

1

1 0 . S U B

0 . 3 1 1 * * *

0 . 2 2 6 * *

*

0 . 1 8 1 * * *

0 . 5 3 0 * * *

0 . 1 7 3 * * *

0 . 1 8 7 * * *

0 . 3 9

1 * * *

0 . 1 0 5 * * *

0 . 0 3 5 1

1 1 . N A T

0 . 3 0 2 * * *

0 . 2 0 1 * *

*

0 . 1 6 6 * * *

0 . 5 2 6 * * *

0 . 1 8 1 * * *

0 . 2 1 2 * * *

0 . 4 1

2 * * *

0 . 1 1 4 * * *

0 . 0 0 2 0 . 9 2 3 * * *

1

ǂ < . 1

0 l e v e l ;

* < . 0

5 l e v e l ; * * < . 0

1 l e v e l ; * * *


21/39

has a negative relationship with MI , but the relationship is not statisti-

cally significant.

4.2. Model Estimation

The estimated results of the generalized linear mixed-effects model with

equations (1) and (2) are presented in Table 5. To identify a model

between a fixed effect model and a random effect model in the equa-

tion (2), we conduct a Hausman test (Hausman, 1978). The statistics

of Hausman test with Model 2, Model 3, and Model 4 are 0.41 (p =

.81), 4.90 (p = .17), and 3.68 (p = .15), respectively. In other models,

we do not find any statistically significant difference too. The result

indicates that estimation results of a fixed effect model and a random

effect model are consistent, and individual effects are uncorrelated with

other independent variables in the model. Therefore, we employ a

random effect model in estimating the equations 2 and 3.10

The effects on valuation of Korean firms are tested in two ways, first

by comparing the domestic sample with multinational samples (Model 3)

and then by identifying the impact of multinationality within the multi-

national sample (models 4 – 8). Along with the composite variable MI ,

each of the four single-item measures of FSTS , FATA, SUB, and NAT isseparately estimated in models 4 through 8, respectively. Each coefficient

and its significance is tested with restricted maximum likelihood (REML)

estimation (Fitzmaurice et al., 2004, p. 99). As expected in Ohlson’s

model, BPS and EPS have significant positive relationships with the

share values, which is qualitatively similar to the results of previous stud-

ies. After adding two additional variables, firm size and leverage, BPS

and EPS still have significant positive relationships with stock price, and

firm size has a significant positive relationship with stock price, but lever-age has a significant negative relationship with stock price.

The focus of Hypothesis 1 is on the valuation of multinational

firms. Model 3 shows that multinational firms have higher valuation

than domestic firms after controlling for firm size and leverage, and

multinational firms have 5,568 Korean won higher valuation on aver-

age (equivalent to $5 based on an exchange rate of 1,090 won to $1).

Focusing on the relationship between the share price and multination-

ality of multinational firms, Model 4 with its composite index of

MI presents a significant positive relationship. Also, models 5 through

8 show the valuation effects of the four single-item measures. The

coefficients of FSTS and FATA are not significant although they are




22/39

T a b l e 5 .

V a l u a t i o n E ff e c t s o f M u l t i n a t i o n a l F i r m s a n d M u l t i n a t i o n a l i t y W i t h S t o c k P

r i c e

M o d e l 1

M o d e

l 2

M o d e l 3

M o d e l 4

M o d e l 5

M

o d e l 6

M o d e l 7

M o d e l 8

M U L T I

M

I

F S T S

F

A T A

S U B

N A T

I n t e r c e p t

8 , 1 8 6 * * *

( 4 . 3

8 )

2 2 8 , 6 8 6 * * *

( 1 0 . 0

3 )

2 4 2 , 8 9 9 * * *

( 1 0 . 3

8 )

2 3 1 , 1

8 7 * * *

( 7 . 5

2 )

2 5 0 , 0 9 7 * * *

( 8 . 0 5 )

2 5 0 , 3

4 7 * * *

( 8 . 0 4 )

1 5 3 , 6 5 9 * * *

( 5 . 0 7 )

1 4 6 , 4 8 2 * * *

( 4 . 6 4 )

B P S

0 . 6 8 6 * * *

( 4 5 . 1 4 )

0 . 6 6 5 *

* *

( 4 4 . 7 0 )

0 . 6 6 5 * * *

( 4 4 . 7 9 )

0 . 7 0 8 * * *

( 3 2 . 5 0 )

0 . 7 1 4 * * *

( 3 2 . 1 6 )

0 . 7 1 5 * * *

( 3 2 . 1 9 )

0 . 6 8 3 * * *

( 3 3 . 7 8 )

0

. 6 9 0 * * *

( 3 3 . 6 8 )

E P S

0 . 2 2 9 * * *

( 4 . 4

1 )

0 . 2 0 1 * *

*

( 3 . 8

9 )

0 . 1 9 8 * * *

( 3 . 8

4 )

0 . 1 5 9 *

( 2 . 0 7 )

0 . 1 5 9 *

( 2 . 0

8 )

0 . 1 5 8 *

( 2 . 0

6 )

0 . 1 2 6 *

( 2 . 4

8 )

0

. 1 5 4 * *

( 2 . 5

7 )

F i r m s i z e

9 , 2 9 7 * *

*

( 1 0 . 5 1 )

9 , 9 2 6 * * *

( 1 0 . 8 5 )

8 , 7 7 2 * * *

( 7 . 3 6 )

9 , 8 9 7 * * *

( 8 . 3

4 )

9 , 9 9 7 * * *

( 8 . 4

4 )

6 , 1 2 7 * * *

( 5 . 2

5 )

5

, 7 3 2 * * *

( 4 . 6

8 )

L e v e r a g e

1 3 , 9 3

3 * *

( 2 . 6 0

)

1 2 , 8

0 5 * *

( 2 . 8 5 )

2 1 , 6 1 3 * *

( 2 . 6

9 )

1 9 , 9

8 3 * *

( 2 . 4 6 )

2 0 , 3 1 3 * *

( 2 . 4 9 )

2 8 , 3

0 6 *

( 2 . 3 8 )

2 0 , 2

7 6 * *

( 2 . 6 1 )

M u l t i n a t i o n a l

d u m m y

5 , 5 6 8 * *

( 2 . 6

0 )


1 8 , 7 8

4 * * *

( 4 . 7 3 )

5 , 0 2 6

( 0 . 4

3 )

3 , 7 6 4

( 0 . 4

3 )

1 4 2 , 9 7 5 * * *

( 9 . 3

8 )

1

3 2 , 3

2 0 * * *

( 8 . 2

4 )

R 2

. 7 4 1

. 7 6 2

. 7 6 3

. 8 0 6

. 7 9 8

. 7 9 9

. 8 3 0

. 8 2 6

N o .

o b s e r v

a t i o n s

2 , 5 9 0

2 , 5 9 0

2 , 5 9 0

1 , 2 9 5

1 , 2 9 5

1 , 2 9 5

1 , 2 9 5

1

, 2 9 5

N o t e s : T h i s t a b l e p r e s e n t s t h e v a l u a t i o n e ff e c t s o f m u l t i n a t i o n a l fi r m s c o m p a r e d t o d o m e s t i c fi r m s , a s w

e l l a s m u l t i n a t i o n a l i t y . T h e d e p

e n d e n t v a r i -

a b l e i s a n e

q u i t y p r i c e a t t h e e n d o f t h e f o l l o w i n g M a r c h .

T h e s t a t i s t i c i n b r a c k e t s i s t h e W h i t e - a d j u s t e d t - s t a t i s t i c . M u l t i n a t i o n a l d u m m

y ( M U L T I )

i s a b i n a r y

v a r i a b l e a s 1 f o r m u l t i n a t i o n a

l fi r m s a n d 0 f o r d o m e s t i c fi r m s . M u l t i n a t i o n a l i t y v a r i a b l e ( M

I ) i s a c o m p o s i t e i n d e x o f F S T S , F A T A ,

S U B ,

a n d

N A T .

O t h e r v a r i a b l e s a r e m

e a s u r e d a s f o l l o w s : B P S = b o o k v a l u e p e r s h a r e ; E P S =

e a r n i n g s p e r s h a r e , F i r m s i z e

=

l o g s a l e s ;

L e v e r a g e =

( d e b t / t o t a l a s s e t s ) 9

1 0 0 ; F S T

S =

( f o r e i g n s a l e s / t o t a l s a l e s ) / m a x [ e a c h y e a r ( f o r e i g n s a l e s / t o t a l s a l e s ) ] ; F A T A =

( f o r e i g n

a s s e t s / t o t a l

a s s e t s ) / m a x

[ e a c h y e a r ( f o r e i g n a s s e t s / t o t a l a s s e t s ) ] ; S U B =

# s u b s i d i a r i e s / m a x ( e a c h y e a r # s u b s i �

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Value Relevance of Multinationality: Evidence from Korean Firms