A Commentary on Risk Reduction by Geographic Diversification

Abstract

The relationship between multinationality and value is still one of the most fundamental questions in IB research. Gande, Schenzler, and Senbet (2009) claim to have found empirical evidence for the incomplete capital markets theory (ICMT), which stipulates that investors value corporate multinationality due to its risk‐reducing effect. We show here that their findings do not support the hypothesis that investors value geographical diversification at the firm level because of its risk reducing effect. Further, a review of extant research shows that empirical results concerning the valuation impact of the risk‐reducing effect of geographical diversification at the firm level have to be regarded with caution due to conceptual and methodological inconsistencies. Consequently, this paper proposes several methodological refinements.

Citation

Eckert, S. and Trautnitz, G. (2010), "A Commentary on Risk Reduction by Geographic Diversification", Multinational Business Review, Vol. 18 No. 4, pp. 95-113. https://doi.org/10.1108/1525383X201000021