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An empirical examination of the direct and indirect effects of geographic diversification on stock market and financial performances of multinational corporations

Woohyun Cho (Department of Management and Marketing, University of New Orleans, New Orleans, Louisiana, USA)
Jian-yu Fisher Ke (Department of Information Systems and Operations Management, California State University Dominguez Hills, Carson, California, USA)
Chaodong Han (Department of e-Business and Technology Management, Towson University, Towson, Maryland, USA)

International Journal of Physical Distribution & Logistics Management

ISSN: 0960-0035

Article publication date: 3 July 2017

Abstract

Purpose

Literature indicates that global geographic diversification (GD) has mixed effects on a multinational corporation’s (MNC) performances. The purpose of this paper is to examine how an MNC’s GD influences its stock market and financial performances directly and indirectly via operational performance (i.e. changes in inventory levels).

Design/methodology/approach

Using firm-level data collected from Compustat database for the period 2000-2011 and estimating a mediating regression model, the authors examine the direct and indirect effects of GD on an MNC’s stock market (Tobin’s q) and financial performances (ROA), with inventory level being a mediator. Additionally, the examination is implemented separately under two economic situations: financial crisis vs without financial crisis.

Findings

The results show that GD enhances an MNC’s stock market performance, while deteriorating its financial performance in the presence of a financial crisis. In contrast, GD has little direct impact on an MNC’s stock market and financial performances during periods without financial crisis. The indirect effects of GD are mediated by changes in inventory levels.

Practical implications

This study suggests that MNCs need to carefully weigh the benefits and costs of global strategy obtained through GD. The results also indicate that GD is highly appreciated by the stock market investors during economic downturns and tighter inventory management may further enhance firm values.

Originality/value

This paper is the first empirical research to estimate both direct and indirect effects of GD via inventory in the operations management literature, highlighting the value of GD depending on the different economic situations and echoing the role of operations in implementing GD.

Keywords

Acknowledgements

This research has benefited from support provided by a grant from the UW-Eau Claire College of Business and the UW-Eau Claire Office of Research and Sponsored Program.

Citation

Cho, W., Ke, J.-y.F. and Han, C. (2017), "An empirical examination of the direct and indirect effects of geographic diversification on stock market and financial performances of multinational corporations", International Journal of Physical Distribution & Logistics Management, Vol. 47 No. 6, pp. 495-515. https://doi.org/10.1108/IJPDLM-01-2017-0015

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited