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Intangible assets and firm diversification

Christopher B. Malone (Department of Finance, Banking and Property, Massey University, Palmerston North, New Zealand)
Lawrence C. Rose (Department of Commerce, Massey University, Albany, New Zealand)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 1 April 2006

2009

Abstract

Purpose

To re‐examine empirically internalisation and transaction cost theories of firm FDI.

Design/methodology/approach

Empirical analysis based on cross sectional multivariate regressions and the Fama‐French three factor event study procedure. In addition to the key explanatory variables the paper introduces and models several important control variables.

Findings

The paper finds evidence consistent with the internalisation and transaction cost hypotheses. Firms classified with internalisation advantages earn event period abnormal returns of 6.84 percent above firms that are classified without such advantages. In support of transaction cost theory the paper finds that FDIs generate an average abnormal event period return of −2.36 percent. Further, in line with transaction cost theory firms classified with intangible asset advantages also tend to engage in the more complex forms of foreign and industrial diversification.

Research limitations/implications

The paper does not determined if the effect linked to the possession of intangible asset advantages is temporary or permanent. FDI is costly, but firms that enjoy high market valuations tend to do well in M&A or FDI activity.

Originality/value

The study provides new and strengthened support for internalisation theory. The study provides new evidence in support of transactions cost theory.

Keywords

Citation

Malone, C.B. and Rose, L.C. (2006), "Intangible assets and firm diversification", International Journal of Managerial Finance, Vol. 2 No. 2, pp. 136-153. https://doi.org/10.1108/17439130610657359

Publisher

:

Emerald Group Publishing Limited

Copyright © 2006, Emerald Group Publishing Limited

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