Value Relevance of Multinationality: Evidence From Korean Firms

Journal of International Financial Management & Accounting 26:2 2015
Value Relevance of Multinationality: Evidence

from Korean Firms
Sangno Lee
College of Business Administration, Chonbuk National University, Jeonju, 561756, Korea
e-mail: sangno.lee@chonbuk.ac.kr
Minho Kim
College of Business Administration, Chonbuk National University, Jeonju, 561756, Korea
e-mail: kimmh@jbnu.ac.kr
Wallace N. Davidson III

Department of Finance, College of Business, Southern Illinois University, Carbondale, IL,
60333
e-mail: davidson@business.siu.edu
Abstract
The purpose of this study is to examine the valuation eects of multinationality in
Korean rms and to identify the role of multinationality in internalization theory. We
hypothesize that the market positively values the multinational activities of Korean
rms, which are operating in a small open economy in which rms have strong motivations for internationalization. We use Ohlsons (1995, Contemporary Accounting
Research, 11, 661) value model and document the positive eect for multinational rms
compared to domestic rms, as well as the positive eect of multinationality on rm
value. These results are robust across studies, as indicated by Tobins q measure, as
well as across years. We also hypothesize that multinationality mediates or moderates
the relationship between intangibility and rm value that is proposed in internalization
theory. We do not nd supporting evidence for a mediated inuence of intangibility
through multinationality on rm value nor for a moderated inuence of intangibility
on rm value. We nd that multinationality and intangibility directly and independently inuence rm value, without any interference from each other. These results are
also robust across studies, as indicated by Tobins q measure. Finally, we nd that multinationality in Korean rms has never lost its importance, even during the global
nancial 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 rm value. Academically,
this question has long been studied among scholars with somewhat
We wish to acknowledge the helpful comments from our two anonymous reviewers.
2015 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
112
Sangno Lee, Minho Kim and Wallace N. Davidson III
contradictory results. Some studies have reported a positive relationship

between multinationality and rm 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 that
international expansion tends to reduce rm 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 measurement 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 multinationality in Korea which experienced a nancial crisis in 19971998 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 activities 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 sucient grounds
for survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,
2003). Thus, rms have to overcome the liabilities of foreignness and
maintain dynamic capabilities, which are dened as the rms ability
to integrate, build and recongure its unique resources to create new
competitive advantages (Maitland and Nicholas, 2002, p. 7). Given
that the ongoing nancial 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 this
topic have centered on U.S. multinationals (Eckert et al., 2010), a multinationality study in the Korean context that considers the experienced 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 rms take on multinational
operations only if the hierarchical model of the organization is ecient
compared to the price systems or markets. Firms will organize domestic or foreign subsidiaries whenever markets operate resources less
2015 John Wiley & Sons Ltd
Value Relevance of Multinationality
113
eciently, such as raw materials, marketing services, and intangible

assets. Thus, internalization theory explains that multinational rms
are organized to bypass inecient resource markets. Despite the
robustness of the theory, an endogeneity issue of multinationality has
been brought up recently (Hennart, 2007; Dastidar, 2009). Dastidar
(2009) argues that rm performance is not a consequence of international diversication per se, but is aected by better performing rms
abroad. For example, rms that have highly dierentiated 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 rm performance, Glaum and Oesterle (2007)
similarly point out that benets from internalization simply accrue
from increased sizes of rms, rather than accruing directly from multinational diversity; multinationality is a means to expand the size of a
rm. In this study, we examine the role of multinationality to determine whether it is a determinant, a mediator, or a moderator of intangible 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 Ohlsons (1995) valuation model, the
validity of which has been successfully demonstrated in many accounting and nance empirical studies (Collins et al., 1998; Francis et al.,
2000; among others). The model expresses the value of the rm as a
function of net assets, accounting prots and other information related
to rm value. Multinationality is included in the model as other
information along with control variables such as rm size. In measuring multinationality, we explicitly recognize Sullivans (1994) suggestion to use composite index measures instead of single-item measures.
Sullivan argues that single-item measures, such as the ratio of a rms
foreign 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 rms expanding 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 rm value is incomplete without taking
self-selection into account.
We study the manufacturing rms listed in the Korea Stock
Exchange over the 7 years from 2003 to 2009 and identify positive
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incremental valuation eects of multinationality. The results are robust

over the years even for the period of global nancial crisis when the
valuation eect is supposed to be decreased remarkably. We also nd
that most of the positive relationships are derived from rms with high
levels of multinationality. The rest of this paper is organized as follows: The next section describes the theoretical background and
hypotheses of this study. Section 3 explains the estimation model, measurement of multinationality, and data. Section 4 presents the empirical results, and the nal 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 multinationality and rm 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 rm 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 intangible assets are rm-specic advantages that cannot easily be copied or
exchanged but can be transferred to subsidiaries. Therefore, a rm
tries to maintain its competitive advantages over other rms by internalizing its foreign market activities in the form of direct investments.
An implication is that the value of a multinational rm 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 intangible
assets (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 nd it dicult to optimally diversify their portfolios internationally due to such
barriers as institutional restrictions on overseas capital ows and information asymmetries. Therefore, multinationals provide investors with
better international diversication opportunities via their foreign direct
investments, which are expected to enhance the values of multinationals in their home country relative to purely domestic rms. Although
there is empirical evidence to support the argument (Errunza and Senbet, 1981, 1984; Kim and Lyn, 1986), investors may already be able to
115
reap the benets of international diversication if capital markets are

suciently integrated (Alder and Dumas, 1983). In this case, diversication at a rm level has little value to the investors.
Managerial objective theory predicts that multinationality would
hamper the rm. 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 dicult for shareholders to monitor managerial decisions.3 This
gives the managers of such rms 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 protable to the
rm because they may reap higher salary, power, and prestige as the
rm grows in size. Therefore, dierences in objectives between managers 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-value
relationships (and multinationality-performance relationships, as well).
Olsen and Elango (2005) report reductions in rm value with multinational operations made by U.S. rms and increases in value for the
Continental European and Japanese rms, indicating that the market
valuation eect may dier on the basis of the environment in which
the rm 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. rms, because of their large domestic
market. Eckert et al. (2010) also argue that, in terms of the multinationality-value relationship, the U.S. rms may be a very special case
due to the size of their home market, and they report evidence of value
enhancement of German rms 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 rms, and these theories have been
used for explicating the eects of multinationality; that is, while the
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rst two theories support a positive relationship with rm performance, the last theory supports a negative relationship. More recently,
researchers note overseas activities of rms based in Europe and Asia
and investigate the impact of multinationality of rms in these two
continents. Study ndings regarding multinationality for non-U.S. and
Korean rms are summarized in Table 1.
In a multivariate analysis using 35 countries data and excluding the
United States, Ferris et al. (2010) nd that global diversication has
no signicant relationship with excess value of rms. In the studies of
European rms, Olsen and Elango (2005) and Eckert et al. (2010) support a global diversication premium, while Capar and Kotabe (2003)
partially support a positive eect with a U-shaped relationship with
return on sales. On the other hand, in the studies of Asian rms, Pan
et al. (2010) nd that global or country diversication has a negative
association with performance, but regional diversication has an
inverted U-shaped relationship with performance. For Japanese multinational rms, Goerzen and Beamish (2003) support a positive association with rm 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) nd 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. rms indicate that the eects of multinationality are inconclusive according to not only measures of rm
performance and multinationality but also dierent 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 characteristics for multinationality. First, Korea has successfully transformed its
economy and achieved economic growth in a short period. In the process of transforming into a developed economy, its primary instrumental means has been exports, foreign direct investment, and overseas
manufacturing, and the Korean government has employed these
approaches to lead Koreas export-oriented policies (Ahn et al., 2005;
Olsen and Elango

(2005)
Garrod and Rees

(1998)
Eckert et al. (2010)
Capar and Kotabe

(2003)
Majocchi et al.
(2005)
Pangarkar and Wu
(2012)
United States,
Europe, and
Japan
United
Kingdom
Germany
Germany
China
Italy
Tobins q
Ferris et al. (2010)
35 Countries
ROA
Exporting
ROS
Tobins q
Stock price
Excess value
and Tobins q
Author(s) and year
Countries
Firm
performance
Table 1. Studies on Multinationality of Non-U.S. Firms
Industry globalization
Firm size and age
Foreign sales to total

sales and foreign
assets, and to total
assets
Foreign sales ratio
A composite index
using foreign sales
ratio, foreign assets
ratio, and foreign
employment ratio
Foreign assets and
foreign prots
Segments of business
operations
Multinationality
A U-shaped curvilinear
relationship
Firm size and age have a
positive relationship with
exporting intensity
A positive relationship
There is valuation dierence

between domestic and
multinational rms
A positive relationship
Industrial diversication alone

has a negative relationship;
global diversication alone
has no signicant relationship;
and industrial and global
diversication each has a
negative relationship
U.S. rms face multinational
discounts, but Europe and
Japan show multinational
premiums
Empirical ndings

117
Pan et al. (2010)
Goerzen and
Beamish (2003)
Lu and Beamish
(2001)
Jinji et al. (2011)
Pattnaik and
Elango (2009)
Chiang and Yu
(2005)
Kim (2009)
China
Japan
Japan
India
Taiwan
Korea
ROA
ROE
Number of countries
and subsidiaries,
foreign sales
Foreign assets
A rms revenue from

foreign countries
International asset
dispersion and
country environment
diversity
Foreign direct
investment
Tobins q
Sharpe measure,
Jensens alpha,
and market-tobook ratio
ROA and ROS
Foreign direct
investment
ROE
Country diversication
(foreign sales) and
regional diversication
(entropy measure)
Multinationality
ROE
Firm
performance
Note: ROA, return on assets; ROS, return on sales; ROE, return on equity.
Japan
Author(s) and year
Countries
Table 1 (Continued)
Firms having higher Tobins q

tend to choose more FDI
An inverted S-shaped
relationship between
internationalization and ROE
An inverted S-shaped
relationship between
multinationality and
performance
A U-shaped relationship
with the number of countries
and subsidiaries; inverted
S-shaped relationship with
foreign sales
For country diversication,

they nd a negative
relationship with
performance, and for
regional diversication, they
nd an inverted U-shaped
relationship
A positive relation with
international dispersion, but
a negative association with
country environment diversity
A U-curve relationship
Empirical ndings
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119
Kim and Lee, 2007; Siegel, 2007). As a result, many Korean rms 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 through
rm-specic advantages, which are unique capabilities proprietary
to the organization (Rugman and Oh, 2008). The adoption of marketoriented economic policies by the Korean government and severe
competition in domestic markets have led Korean rms 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 rms have grown from small
companies with low levels of multinationality to Chaebols with high
levels of multinationality, allowing researchers to investigate the eects
of multinationality in an emerging market.
A second unique characteristic of Korean rms regarding multinationality is that Korea experienced a turbulent currency crisis in 1997
and 1998 and a global nancial crisis in 2008, and many rms went
bankrupt during this period. In particular, after the currency crisis,
Korean rms had considerable productivity growth because they
employed eciency-oriented strategies, and the export-oriented rms
achieved more growth than the domestic rms (Rhee and Pyo, 2010).
Ahn et al. (2005) nd that internationalization has a positive association with productivity growth. Thus, Koreas diverse economic environment may reveal the important eects of multinationality well.
Third, Korea is sandwiched between two large countries, China and
Japan. China has achieved fast economic growth and enhanced technological competitiveness based on low costs of production and expanded
market opportunities. Japan is the worlds third largest economy after
the United States and China and leads technology innovation and
produces important electronic components (Kwon and Chun, 2008).
Chinese rms are likely to catch up with Korean rms 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
rms have continued to rely on technologies and components of
machineries from Japan. In this situation, Korea has attempted to
improve the competitiveness of manufacturing rms through exporting
(Choi et al., 2010). In light of these contexts, we argue that Korea
could be a denitive 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)
nd that Korean rms have motivations for multinationality, not for
exploiting country-specic advantages such as cheap and skilled labor
and government subsidies, but for exploiting rm-specic advantages
obtained by expanding research and development capacity and
advanced knowledge and skills. Korean rms consider physical distance (Erramilli et al., 1999), investment incentives, and trade barriers
(Kwon, 2002) when selecting target countries for foreign direct investment. It is only lately that the relationship between multinationality
and performance of Korean rms has drawn attention from researchers. For example, examining 231 rms from 2003 to 2005, Kim (2009)
nds that multinationality has a U-shaped relationship with rm performance. One possible reason for the scarcity of multinationality
studies in Korea, we believe, is that there are few available databases
that record rms foreign business activities, such as foreign subsidiaries 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 international 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 sucient grounds for
survival (Bellak and Cantwell, 1988; Noorderhaven and Harzing,
2003). Thus, such rms are apt to overcome the liabilities of foreignness and to maintain their dynamic capabilities, dened as the
rms ability to integrate, build and recongure its unique resources
to create new competitive advantages (Maitland and Nicholas,
2002, p. 7). Accordingly, the market values overseas expansion performed by rms originating in small open economies, despite the
associated additional costs and risks (Eckert et al., 2010). Also,
rms with lower levels of multinationality may not create more benets 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 benets of internationalization 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 rms operating in a small open

economy are positively valued.
2.5. Reconsideration of Internalization Theory

A multinational rm is dened as a rm that owns and controls business activities in two or more countries (Buckley and Casson, 2009).
Internalization theory explains that the boundaries of organizations
(Coase, 1937) are set where the benets from multinational operations
are just oset by their costs. Multinational rms internalize business
activities that previously depended on price systems of markets if they
can maximize prots by putting such business activities under their
control. Firms will organize domestic or foreign subsidiaries whenever
markets provide resources less eciently, such as raw materials, management services, and intangible assets. Thus, internalization theory
explains that multinational rms are organized to bypass inecient
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 rm performance is not a consequence of international diversication, but is
rather caused by the fact that better performing rms expand abroad.
In other words, rms that have highly dierential products and intangible 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 rm performance, conducted by
Glaum and Oesterle (2007) who observe that benets simply accrue
from increased rm size rather than specically from international
diversication. Hennart (2007) argues that rms that invest heavily in
intangible assets tend to exploit them through multinational operations. Thus, it is necessary to separate multinationality from intangibles to understand eects on rm performance. Based on these
arguments, we propose the following hypothesis on the role of multinationality.
H2: Multinationality mediates the relationship between rms intangibles
and their performance.
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3. Research Design
3.1. Research Model
We recognize that many prior studies have discussed valuation issues
based 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 rm protability, sales growth, and
prot growth and margin, are based on the underlying assumptions
that protability measures represent rms ability to generate earnings
and growth measures are visible and interpretable variables with little
inuence by accounting principles. However, such measures are simply
one type of measures of rm performance and do not represent the
value of a rm regarding how much investors would pay to buy the
rm. In contrast, the stock market-centric measures represent the value
of a rm 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 rms assets are ultimately
reected in stock prices; this theory is supported by Famas (1970)
ecient market hypothesis.
The valuation model used in this study is based on Ohlsons (1995)
valuation model, which expresses an equity price as a function of current book value per share, earnings per share, and other information.
Although Tobins q, the ratio of the market value of a rms assets to
the replacement cost of the rms assets, can be used as a stock market
measure, we prefer Ohlsons valuation model because it provides two
further advantages. First, it is a valuation model that explains the relationship 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 performance measures likely to be biased or misspecied. Many prior studies
have veried the validity of Ohlsons model empirically (Myers, 1999;
Lo and Lyx, 2000; Morel, 2003). Additionally, the model measures
market value of a rm, like Tobins q, for reecting the eects of
intangible assets as well as long-term eects of business activities.
Ohlsons (1995) model is drawn from strict assumptions and deductive methods rather than from an empirical test. We use an empirical
version of Ohlsons model that incorporates an intercept variable and
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Table 2. The Firm Performance Measures and Their Rationale

Performance
measures
Firm protability
with ROA and ROS
Sales growth
Prot growth and

prot margin
Tobins q
Ohlsons valuation
model
Rationale
Studies
A class of nancial
metrics has used to
access a businesss ability
to generate earnings,
compared to its expenses
and other relevant costs
incurred during a specic
period of time
Sales growth is the most
visible and interpretable
variable with little inuence
of accounting principles
Growth without protability
is not sustainable
Tobins q is forward-looking
and risk-adjusted. The measure
can consider not only a rms
long-term performance but
also the value of intangible assets
This is a model rather than a just
performance measure. The power
of explanation has been
tested in many previous studies
Weill and Vitale (2002)

and Mackey (2008)
Jarvenpaa and Ives (1990)
OSullivan and
Abela (2007)
Ravichandran
et al. (2009)
Garrod and Rees (1998)
supposes a non-unity coecient of book value per share (Myers, 1999;

Lo and Lyx, 2000). That is,
Priceit1 b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit eit 1
where Priceit + 1 = equity price of a rm i at t + 1, BPSit = book
value per share of a rm i at t, EPSit = earnings per share of a rm i
at t, Sizeit = log sales of a rm i at t, Leverageit = total debt/total
assets of a rm 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 scal year. Because stock
price of a rm reects its earnings information through earning
announcement generally, lead values for stock price relative to independent variables are employed in the equation. Financial statements
are generally produced and released after 2 or 3 months later from a
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scal year, so the time is required for the information to be reected in

stock price.5
Based on the equation (1), we develop several models to test our
two hypotheses. To test Hypothesis 1, we include multinationality
index (MI) and a binary variable to indicate a multinational or
domestic rm (MULTI). MULTI is used to measure the dierence in
eects between multinational rms and domestic rms, and MI is
used to measure the eect of multinationality within multinational
rms. Also, because our data are panel data, that is, time series and
cross-sectional data, we incorporate heterogeneity between rms and
serial correlations between years using a generalized linear mixedeects model (Fitzmaurice et al., 2004; Wooldridge, 2010). In a generalized linear mixed-eects model, the stock price for the i rm at the
t year is assumed to dier from the population mean by a rm-specic eect (the xed eects) and a within-rm measurement error (the
random eects). The within-rm measurement errors are independently 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 rmspecic regression coecients, a, describes how the trajectory of stock
price of i rm deviates from the overall population trend in the
following model.6 That is,
Priceit1 b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit
b5 MULTI b6 MI ai eit
where MULTI = multinational or domestic rm (multinational = 1

and domestic = 0), MI = multinationality index, and ai = mixed eects
(random eects or xed eects).
The variable, ai, is to control for individual rm heterogeneity
with a random eect model or a xed eect model. The crucial difference between two models is whether individual rm eects are
related with other independent variables. A random eect model
assumes that individual eects are uncorrelated with the independent
variables, but a xed eect model assumes that they are correlated
with the independent variables. Hausman (1978) proposes a test
based on the dierence of estimates of two models that if individual
eects are correlated with the independent variables, the dierence
between them should be statistically signicant. If a random eect
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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 modeled with a random component of ra.
To test Hypothesis 2, we include an intangible assets variable
(INTAN) which combines two variablesresearch and development
and advertisement expenditures to total assets. Then, we establish the
following four models to test the role of multinationality as a direct
eect, a direct mediated eect, an indirect mediated eect, and a
moderated eect.
MI b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit
b5 INTAN ai eit
3a

b5 INTAN ai eit
3b

b5 INTAN b6 MI ai eit
3c

b5 INTAN b6 MI b7 MI INTAN ai eit
3d
3.2. Measurement of Multinationality

Multinationality has been measured in various ways in extant empirical 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 phenomenon. Sullivan also points out that some conceptually irrelevant
factors, such as random shock in currency rates, may articially inate
or deate a rms 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
126
measure (FSTS), structural measures (FATA and the ratio of foreign

subsidiaries to total subsidiaries), and attitudinal measures (the overseas experience of top management and the psychic dispersion of the
countries in which the rm operates). Although this type of composite
index has been criticized as lacking a theoretical background (Annavarjula and Beldona, 2000) and content validity (Ramaswamy et al.,
1996), it is technically more reliable and inclusive for measuring the
multidimensionality of multinational rms (Li, 2007).
We have composed a Sullivan-type composite index with four singleitem 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 rms 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 years sample; the result ranges from 0 to 1,
with 1 representing the rm with the largest number of foreign subsidiaries in a specic year. The same rule is applied to the nations, with 1
representing the rm with the largest number of countries in which its
foreign 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 FSTS FATA SUB NAT
where FSTS = foreign sales/total sales, FATA = foreign assets/total
assets, SUB = subsidiaries/maximum number of subsidiaries in each
years sample, and NAT = nations/maximum number of nations in
which subsidiaries operate in each years sample.
The maximum value of MI is 4, which represents a rm with maximum 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 rms listed in the
Korea Stock Exchange from 2003 to 2009. Their share prices, book
127
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 rms. Only rms with December scal year end are included
in 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 Ohlsons
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 subsidiaries operate is obtained from the footnotes of the rms consolidated
nancial statements that present the status of their consolidated
subsidiaries. International Financial Reporting Standards (IFRS) allow
rms to report the status of consolidated subsidiaries if the rms have
signicant inuence or control of the investee companies (Kieso et al.,
2011, pp. 893-900). We collect the national information of subsidiaries
from the consolidated nancial statement if rms report the information and glean it from the homepages of rms, otherwise. The sample
period covers 7 years, 20032009, inclusive, for 633 manufacturing
rms.
We, then, examine multinational rms using the criteria of foreign
sales, assets, subsidiaries, and nations. If a rm has nonzero values in
all 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 rm. Otherwise, we classify it as a domestic rm. Of the 633 manufacturing rms, we obtain 265 multinational
rms. Hypothesis 1 includes the comparison of multinationality eects
between domestic rms and multinational rms. However, the simple
comparison of multinational rms with domestic rms could lead to
selection bias (Heckman, 1979) because the sample size of the domestic rms is greater than that of the multinational rms. To control
selection bias in a sample matching method, we select the domestic
rms corresponding to the multinational rms using the propensity
score method with a probit model (Heckman, 1979; Dastidar, 2009).
That is,
Prmulti 1 UX0 b;
where Pr is probability, is a normal cumulative distribution function, b is a coecient, and X is BPS, EPS, industry of rms, and total
assets. When matching a domestic rm to a multinational rm, we rst
128
apply industry and year criteria and then nd the domestic rms with
the closest propensity score to that of the multinational rms. By
applying this rule, we obtain 393 domestic rms with 1,295 rm-year
observations that correspond to 265 multinational rms with 1,295
rm-year observations. The sample size of domestic rms is larger than
that of multinational rms because the matching of samples is conducted by industry rst and by year second. Also, because rms could
be classied as domestic rms before they had become multinational
rms, the total number of rms is 552, not 658,7 but with the same
2,590 rm-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 the
full, 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, rm size, and leverage variables, with the multinational
sample showing greater values than the domestic sample. The
average value of intangibility, measured by research and development 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 rms 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 rms
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 rms in the multinational sample possess on average 12 per cent of foreign assets, while
129
Table 3. Descriptive Statistics

Variable
Mean
Full Sample (2,590)

Price
32355.44
BPS
33764.46
EPS
2675.86
Firm size
26.36
Leverage
44.04
Intangibility
0.08
Domestic sample (1,295)
Price
30758.44
BPS
33410.45
EPS
2622.44
Firm size
25.72
Leverage
40.27
Intangibility
0.11
Multinational sample (1,295)
Price
33952.44
BPS
34118.46
EPS
2729.49
Firm size
27.00
Leverage
47.80
Intangibility
0.05
MI
0.83
FSTS
0.56
FATA
0.12
SUB
0.05
NAT
0.09
SD
Min
Max
94541.57
104731.34
13499.54
1.62
20.06
0.15
101.00
18536.18
278699.00
20.47
0.99
0.00
1319000.00
1704376.69
407015.00
32.12
214.07
1.15
104631.13
106689.27
8790.65
1.19
19.95
0.18
130.00
1725.46
27845.00
20.79
0.99
0.00
1319000.00
1704376.69
177163.00
30.07
214.07
1.12
83248.69
102568.10
16950.95
1.74
19.46
0.09
0.41
0.25
0.13
0.10
0.12
101.00
18536.18
278699.00
20.47
1.23
0.00
0.13
0.10
0.00
0.00
0.02
900000.00
1509451.82
407015.00
32.12
118.09
1.15
2.74
0.99
0.99
1.00
1.00
Notes: Price = Price per share at the end of the following March; BPS = book value per
share; 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 [each
year (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries);
NAT = #nations/max (each year #nations); and MI = FSTS + FATA + SUB + NAT.
the maximum gure is 99 per cent. The average values of SUB and
NAT are 0.05 and 0.09, respectively.
Table 4 presents the correlation coecients 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 Ohlsons
model. As expected, rm size and intangibility have positive relationships with Price, and Leverage has a negative relationship with Price.
Price has positive relationships with SUB and NAT, but negative
relationships with FSTS and FATA, revealing the possibility that each
single-item measure has a dierent eect on the rm value. Also, Price
1
0.876***
0.732***
0.557***
0.147***
0.118***
0.037
0.060**
0.323*
0.311***
0.302***
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
1
0.698***
0.454***
0.257***
0.004
0.121***
0.105***
0.405***
0.226***
0.201***
1
0.400***
0.256***
0.105***
0.080**
0.089***
0.265**
0.181***
0.166***
<.10
level; *<.05 level; **<.01 level; ***<.001 level.
Price
BPS
EPS
Firm size
Leverage
Intangibility
MI
FSTS
FATA
SUB
NAT
Variables
Table 4. Correlations Between the Variables
1
0.281***
0.020
0.204***
0.040
0.190***
0.530***
0.526***
1
0.126***
0.170***
0.085**
0.074**
0.173***
0.181***
1
0.170***
0.205***
0.142***
0.187***
0.212***
1
0.877***
0.574***
0.391***
0.412***
1
0.491***
0.105***
0.114***
1
0.035
0.002
1
0.923***
10
11
130
131
has a negative relationship with MI, but the relationship is not statistically signicant.
4.2. Model Estimation

The estimated results of the generalized linear mixed-eects model with
equations (1) and (2) are presented in Table 5. To identify a model
between a xed eect model and a random eect model in the equation (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 nd any statistically signicant dierence too. The result
indicates that estimation results of a xed eect model and a random
eect model are consistent, and individual eects are uncorrelated with
other independent variables in the model. Therefore, we employ a
random eect model in estimating the equations 2 and 3.10
The eects on valuation of Korean rms are tested in two ways, rst
by comparing the domestic sample with multinational samples (Model 3)
and then by identifying the impact of multinationality within the multinational sample (models 48). Along with the composite variable MI,
each of the four single-item measures of FSTS, FATA, SUB, and NAT is
separately estimated in models 4 through 8, respectively. Each coecient
and its signicance is tested with restricted maximum likelihood (REML)
estimation (Fitzmaurice et al., 2004, p. 99). As expected in Ohlsons
model, BPS and EPS have signicant positive relationships with the
share values, which is qualitatively similar to the results of previous studies. After adding two additional variables, rm size and leverage, BPS
and EPS still have signicant positive relationships with stock price, and
rm size has a signicant positive relationship with stock price, but leverage has a signicant negative relationship with stock price.
The focus of Hypothesis 1 is on the valuation of multinational
rms. Model 3 shows that multinational rms have higher valuation
than domestic rms after controlling for rm size and leverage, and
multinational rms have 5,568 Korean won higher valuation on average (equivalent to $5 based on an exchange rate of 1,090 won to $1).
Focusing on the relationship between the share price and multinationality of multinational rms, Model 4 with its composite index of
MI presents a signicant positive relationship. Also, models 5 through
8 show the valuation eects of the four single-item measures. The
coecients of FSTS and FATA are not signicant although they are
.741
2,590
.762
2,590
228,686***
(10.03)
0.665***
(44.70)
0.201***
(3.89)
9,297***
(10.51)
13,933**
(2.60)
8,186***
(4.38)
0.686***
(45.14)
0.229***
(4.41)
.763
2,590
242,899***
(10.38)
0.665***
(44.79)
0.198***
(3.84)
9,926***
(10.85)
12,805**
(2.85)
5,568**
(2.60)
Model 3
MULTI
18,784***
(4.73)
.806
1,295
231,187***
(7.52)
0.708***
(32.50)
0.159*
(2.07)
8,772***
(7.36)
21,613**
(2.69)
Model 4
MI
5,026
(0.43)
.798
1,295
250,097***
(8.05)
0.714***
(32.16)
0.159*
(2.08)
9,897***
(8.34)
19,983**
(2.46)
Model 5
FSTS
3,764
(0.43)
.799
1,295
250,347***
(8.04)
0.715***
(32.19)
0.158*
(2.06)
9,997***
(8.44)
20,313**
(2.49)
Model 6
FATA
142,975***
(9.38)
.830
1,295
153,659***
(5.07)
0.683***
(33.78)
0.126*
(2.48)
6,127***
(5.25)
28,306*
(2.38)
Model 7
SUB
132,320***
(8.24)
.826
1,295
146,482***
(4.64)
0.690***
(33.68)
0.154**
(2.57)
5,732***
(4.68)
20,276**
(2.61)
Model 8
NAT
Notes: This table presents the valuation eects of multinational rms compared to domestic rms, as well as multinationality. The dependent variable is an equity price at the end of the following March. The statistic in brackets is the White-adjusted t-statistic. Multinational dummy (MULTI)
is a binary variable as 1 for multinational rms and 0 for domestic rms. Multinationality variable (MI) is a composite index of FSTS, FATA,
SUB, and NAT. Other variables are measured as follows: BPS = book value per share; EPS = earnings per share, Firm size = log sales;
Leverage = (debt/total assets) 9 100; FSTS = (foreign sales/total sales)/max [each year (foreign sales/total sales)]; FATA = (foreign assets/total
assets)/max [each year (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries); NAT = #nations/max (each year #nations);
and MI = FSTS + FATA + SUB + NAT.
<.10 level; *<.05 level; **<.01 level; ***<.001 level.
R2
No. observations
Multinational
dummy
Multinationality
Leverage
Firm size
EPS
BPS
Intercept
Model 2
Model 1
Table 5. Valuation Eects of Multinational Firms and Multinationality With Stock Price
132
133
positive, but the coecients of SUB and NAT are positive and signicant, similar to MI, indicating that we may obtain a dierent result if
we use a single measure as a proxy of multinationality. The overall
explanatory power of the models is high with R2 values from .741 to
.830 because we incorporate Ohlsons valuation model, instead of a
performance measure. Thus, these results reveal that investors not only
positively value more multinational rms than domestic rms, but also
put higher value on multinationality within multinational rms, supporting Hypothesis 1.
To test Hypothesis 2, we estimate multiple generalized linear mixed
models with equations 3(ad), and the results are presented in Table 6.
Because each variable is measured on a dierent scale and unit, we
also present the standardized coecients to facilitate comparisons
among coecients. Standardized coecients are interpreted as showing
the relative eect of one independent variable compared to another
independent variable. The mediation model oers an explanation for
how intangibility (INTAN) is related to stock price (Price), when an
intervening or mediating variable, multinationality (MI), is hypothesized to be intermediated between the two variables. The second column of Table 6 shows a zero-order relationship between intangibility
(INTAN) and multinationality (MI) with other control variables. Likewise, the third column of Table 6 shows a zero-order relationship
between intangibility (INTAN) and stock price (Price) with other control variables. The fourth column of Table 6 presents the eect of
intangibility (INTAN) on stock price (Price), controlling for multinationality (MI). The associations among intangibility, multinationality,
and price are presented in the panel (a) of Figure 1. In this gure, a is
the eect of the intangibility variable on multinationality and c is the
overall eect of intangibility on stock price. The variable c is the eect
of intangibility, controlling for multinationality eect b (Mackinnon,
2008). Each model of 3(ac) is estimated with a generalized linear
mixed-eects model.
The three columns of unstandardized coecients in Table 6 present
the eects of a, b, c, and c . Based on the results, we draw the left
diagram in the panel (b) of Figure 1 and present each coecient on
the triangle diagram. The eect of intangibility on multinationality is
0.193 (signicant at 10 per cent level, t = 1.85) and that on price is
29,447 (not signicant, t = 1.64). The eect of intangibility on stock
price controlling for multinationality is 28,172 (signicant at 10 per
cent level, t = 1.78), and the eect of multinationality on stock price
.779
287,241***
(7.71)
0.654***
(25.87)
0.144*
(2.42)
11,521***
(8.17)
25,086*
(2.52)
29,447
(1.64)
1.066***
(3.43)
0.687***
(3.27)
0.101
(0.31)
0.066***
(5.72)
0.047
(0.78)
0.193
(1.85)
.197
Price
MI
.791
256,224***
(7.01)
0.645***
(26.29)
0.151*
(2.56)
9,577***
(6.79)
27,030**
(2.78)
28,172
(1.78)
28,618***
(5.81)
Price
.197
0.031
(0.49)
0.192***
(3.27)
0.004
(0.31)
0.293***
(5.72)
0.022
(0.78)
0.047
(1.85)
MI
.779
0.002
(0.08)
0.819***
(25.87)
0.029*
(2.42)
0.222***
(8.17)
0.052*
(2.52)
0.031
(1.64)
Price
Standardized
coecients
.791
0.001
(0.05)
0.807***
(26.29)
0.031*
(2.56)
0.188***
(6.79)
0.056**
(2.78)
0.030
(1.78)
0.127***
(5.81)
Price
.795
0.124***
(4.56)
0.015 (1.02)
25,753***
(4.56)
34,311 (1.02)
.795
0.804***
(26.40)
0.030*
(2.48)
0.186***
(6.72)
0.056**
(2.78)
0.040 (0.39)
0.002 (0.09)
Price
250,947***
(6.84)
0.642***
(26.40)
0.146*
(2.48)
9,454***
(6.72)
26,960**
(2.78)
9,552 (0.39)
Price
Unstandardized Standardized
coecient
coecient
Moderated eects
Notes The dependent variable is an equity price at the end of the following March. The variables are measured as in Table 5; IVs = independent
variables; DVs = dependent variables; and MI = multinationality. We additionally test the moderating eect of multinationality using four measures
including FSTS, FATA, SUB, and NATION, but all their coecients were not signicant.
Multinationality 9
Intangibility
R2
Multinationality
Intangibility
Leverage
Firm size
EPS
BPS
Intercept
Eects
IVs/DVs
Unstandardized
coecients
Mediated eects
Table 6. The Direct Eects, Mediated Eects, and Moderated Eects of Multinationality on the Relationship Between
Intangibility and Stock Price
134
135
(a) A path diagram of intangibility, multinationality, and stock price
Multinationality
a
b
c
Intangibility
Price
(b) Direct, mediating, and moderating effects of multinationality

Multinationality
Multinationality
0.193
Intangibility
0.047
28,618***
28,172
29,447
Unstandardized coefficients
Price
Intangibility
0.127***
0.030
0.031
Price
Standardized coefficients
Figure 1. The Path Diagram and the Mediating and Moderating

Eects of Multinationality on the Relationship Between Intangibility
and Stock Price
Notes: The coecient a in (a) is the eect of intangibility on multinationality, and b and c are the eects of intangibility on price, controlling for multinationality. The coecient of c is the direct eect
of intangibility on price.
is 28,618 (signicant at <.001 level, t = 5.81). Thus, one unit of intangibility inuences multinationality by 0.193 and then stock price by
28,618, so the overall indirect eect of multinationality is 5,523 (0.193
9 28,618 = 5,523), corresponding to 19 per cent (5,523/28,618 =
0.193). This means that the direct eect of multinationality on stock
price is 23,095 (28,6185,523), and the indirect eect of intangibility
through multinationality is 5,523. In contrast, we do not nd evidence
to indicate a direct eect of intangibility on stock price. Although the
indirect eect of intangibility (19 per cent) seems to be signicant, this
determination does not consider the dierent variances of coecients.
Sobel (1986) derives the variance of indirect eect (product of a and b)
based on the multivariate delta method, and the statics follow a
normal distribution.11 The z-statics of the Sobel test indicate that the
136
indirect eect is not signicant at the .05 level (z = 1.75). Because

intangibility, multinationality, and stock price are measured with
dierent units and scales, a more precise comparison of coecients is
obtained from the standardized coecients.
The standardized coecients of the mediated eect of multinationality are presented in the fth to the seventh column of Table 6, and
based on the results, a diagram of relationships is presented in the
right diagram of panel b of Figure 1.12 The direct eect of intangibility
on multinationality is 0.047, and the eects of multinationality and
intangibility on price are 0.127 and 0.030, respectively. However, the
direct eect of intangibility on price without controlling multinationality is 0.031, but the result is not statistically signicant. The indirect
eect of intangibility through multinationality is 0.006 (0.047 9 0.127).
We conduct Sobel test for this indirect eect, nding the statistic is
1.09, which indicates the indirect eect is not signicant.
We also test the moderated eect of multinationality, and the results
are shown in the last two columns of Table 6. The coecients of multinationality in the unstandardized and standardized models are 34,311
(t = 1.02) and 0.015 (t = 1.02), respectively, but they are not statistically signicant. Thus, from this test, we conclude that multinationality
does not moderate nor mediate between intangibility and stock price,
and thus we do not nd evidence to support Hypothesis 2. Instead, we
nd that multinationality and intangibility directly and independently
inuence stock price, without any inference from each other.
4.3. Robustness Checks

We further test two hypotheses by taking Tobins q as a dependent
variable, the ratio between the market value and replacement value of
the same assets, along with other control variables. The valuations of
the domestic and multinational rms with Tobins q are presented in
Table 7. Model 1 presents a baseline model. The rm size variable is
positive but not signicant (0.010), leverage is signicantly negative
(0.396), and intangibility is signicantly positive (0.315). In the comparison of Tobins q between domestic rms and multinational rms,
multinational rms have produced the greater rm performance
(0.095). Model 3 with composite index MI presents a signicant positive relationship with Tobins q. In the single-item measure of multinationality, models 4 and 5 with FSTS and FATA do show positive but
not signicant relationships with Tobins q. The coecients of SUB in
.137
0.638
(1.94)
0.010
(0.85)
0.396***
(5.36)
0.315**
(3.24)
.137
0.288
(0.83)
0.021
(1.68)
0.388***
(5.25)
0.281**
(2.88)
0.095**
(3.17)
Model 2
MULTI
0.092
(1.86)
.177
0.233
(0.61)
0.041**
(2.81)
0.519***
(5.43)
0.203
(1.28)
Model 3
MI
0.00009
(0.11)
.169
0.357
(0.94)
0.048***
(3.39)
0.517***
(5.40)
0.187
(1.16)
Model 4
FSTS
0.0005
(0.38)
.181
0.381
(0.99)
0.049***
(3.43)
0.520***
(5.40)
0.190
(1.19)
Model 5
FATA
0.455*
(2.34)
.172
0.087
(0.21)
0.031
(1.93)
0.505***
(5.28)
0.156
(0.326)
Model 6
SUB
0.457*
(2.25)
.178
0.139
(0.32)
0.028
(1.72)
0.510***
(5.35)
0.158
(0.99)
Model 7
NAT
Notes: This table presents the valuation eects of multinational rms compared to domestic rms, as well as multinationality. The dependent variable is Tobins q at the end of scal year. The statistic in brackets is the White-adjusted t-statistic. Multinational dummy (MULTI) is a binary variable as 1 for multinational rms and 0 for domestic rms. Multinationality variable (MI) is a composite index of FSTS, FATA, SUB, and NAT.
Other variables are measured as follows: BPS = book value per share; EPS = earnings per share; Firm size = log sales; Leverage = (debt/total
assets) 9 100; FSTS = (foreign sales/total sales)/max [each year (foreign sales/total sales)]; FATA = (foreign assets/total assets)/max [each year (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries); NAT = #nations/max (each year #nations); and MI = FSTS +
FATA + SUB + NAT.
Multinational
dummy
Multinationality
Intangibility
Leverage
Firm size
Intercept
Model 1
Table 7. Valuation Eects of Multinational Firms and Multinationality With Tobins q

137
138
Model 6 and NAT in Model 7 have signicant positive relationships

with Tobins q. These results are similar to the results of Ohlsons
model that MI, SUB, and NAT have signicant positive relationships
with the dependent variable, but FSTS and FATA do not. The R2 values of these models are lower than in Ohlsons model because these
models are not based on the robust valuation theory. The results using
Tobins q provide further evidence to support Hypothesis 1 that the
multinational activities of Korean rms are positively valued.
The direct, mediated, and moderated eects of multinationality with
Tobins q are presented in Table 8. In the unstandardized model, the
eect of intangibility on multinationality is 0.025 and on Tobins q is
0.286, but both coecients are not signicant. The eect of intangibility on stock price controlling for multinationality is 0.203, and the
eect of multinationality on stock price is 0.092. Thus, one unit of
intangibility inuences multinationality by 0.025 and then stock price
by 0.092, so the overall indirect eect of multinationality is 0.0023
(0.025 9 0.092), corresponding to 2.5 per cent (0.0023/0.092). Because
the eect of intangibility on multinationality is not signicant and the
indirect eect of multinationality is small (2.5 per cent), multinationality does not mediate between intangibility and stock price. In the standardized model, the eect of intangibility on multinationality is 0.006
and on Tobins q is 0.218, respectively, but both coecients are not
signicant. The coecients of intangibility and multinationality are
0.02 and 0.037 in the seventh column, but only multinationality has a
signicant and positive relationship with Tobins q. The moderated
eects of multinationality are 0.224 for the unstandardized model
and 0.009 for the standardized model, which is shown in the last two
columns, but they are not signicant. Thus, the only examined factor
with a signicant direct impact on Tobins q is multinationality, which
is qualitatively the same result as that found with Ohlsons model. This
nding supports that multinationality inuences Tobins q directly.
We determine on a sensitivity test according to year because the
sample period (20032009) includes a global nancial crisis of 2008.
Table 9 presents the yearly estimation results with the composite MI.
The coecients of BPS and EPS are positive and signicant. Except
for 2004, rm size has a positive relationship with stock price. The
multinationality variable has a signicant and positive relationship
with stock price over all years, indicating that investors put greater
weight on multinational business activities. We also observe that the
coecients of multinationality in 2003 at 59,484 and 2009 at 45,628
.114
1.880***
(5.56)
0.098***
(7.80)
0.010
(0.18)
0.025
(0.25)
.168
0.355
(0.93)
0.048***
(3.41)
0.516***
(5.40)
0.286
(1.17)
.177
0.233
(0.61)
0.041**
(2.81)
0.519***
(5.43)
0.203
(1.28)
0.092
(1.86)
.114
6.587
(7.87)
0.241
(7.80)
0.005
(0.18)
0.006
(0.25)
.168
0.594
(1.54)
0.048***
(3.41)
0.099***
(5.40)
0.218
(1.17)
.177
0.398
(1.00)
0.414**
(2.81)
0.099***
(5.43)
0.020
(1.28)
0.037
(1.86)
0.100***
(5.45)
0.014 (0.83)
0.039 (1.95)
0.520***
(5.45)
0.330 (1.33)
0.111 (1.94)
.182
.182
0.009 (0.66)
0.042** (2.86)
0.042* (2.86)
0.224 (0.66)
0.422 (1.05)
Standardized
coecient
q
0.268 (0.69)
Unstandardized
coecient
q
Standardized
coecients
MI
q
Unstandardized
coecients
MI
q
Notes The dependent variable is Tobins q at the end of scal year. The variables are measured as in Table 5; IVs = independent variables;
DVs = dependent variables; MI = multinationality; and Intangibility = (R&D/Total assets)/max [each year (R&D/Total assets)] + (Advertisement/
Total assets)/max [each year (Advertisement/Total assets)]. We additionally test the moderating eect of multinationality using four measures
including FSTS, FATA, SUB, and NATION, but all their coecients were not signicant.
Multinationality 9
Intangibility
R2
Multinationality
Intangibility
Leverage
Firm size
Intercept
Eects
IVs/DVs
Moderated eects
Mediated eects
Table 8. The Direct Eects, Mediated Eects, and Moderated Eects of Multinationality on the Relationship Between
Intangibility and Tobins q

139
29,605
(0.93)
0.138***
(5.32)
5.194***
(15.92)
1,012 (0.82)
6,949
(0.71)
11,726*
(2.27)
.832
167
167
204,459**
(3.03)
0.665***
(4.97)
0.866
(1.79)
7,107*
(2.61)
51,518*
(2.30)
59,484***
(5.25)
.583
152
152
183
183
153,533***
(2.94)
0.348***
(11.26)
4.681***
(9.06)
5,696**
(2.74)
21,046
(1.22)
21,066*
(2.43)
.830
2005
186
186
93,360**
(3.00)
0.850***
(41.14)
4.116***
(16.29)
2,750*
(2.24)
12,717
(1.22)
16,959**
(3.19)
.830
2006
195
195
164,529**
(2.85)
0.539***
(13.03)
5.591***
(9.17)
5,708*
(2.48)
18,288
(0.84)
16,798
(1.85)
.868
2007
209
209
131,281**
(3.34)
0.641***
(26.97)
2.465***
(9.46)
4,672**
(2.95)
12,396
(0.87)
17,559**
(3.08)
.879
2008
203
203
398,402***
(5.46)
0.616***
(11.38)
0.448*
(2.41)
16,220***
(5.47)
118,810***
(4.17)
45,628***
(3.88)
.766
2009
Notes This table presents the valuation eects of multinationality by year. The dependent variable is an equity price at the end of the following
March. The statistic in brackets is the White-adjusted t-statistic. Multinationality variable (MI) is a composite index of FSTS, FATA, SUB, and
NAT. Other variables are measured as follows: BPS = book value per share; EPS = earnings per share; Firm size = log sales; Leverage = (debt/total
assets) 9 100; FSTS = (foreign sales/total sales)/max [each year (foreign sales/total sales)]; FATA = (foreign assets/total assets)/max [each year (foreign assets/total assets)]; SUB = #subsidiaries/max (each year #subsidiaries); NAT = #nations/max(each year #nations); and
MI = FSTS + FATA + SUB + NAT.
R2
Samples
No. multinational
rms
No. domestic
rms
Multinationality
Leverage
Firm size
EPS
BPS
Intercept
2004
2003
Table 9. Valuation Eects of Multinationality by Year
140
141
are two to three times larger than in other years, and the coecients
of leverage in the 2 years are higher than other years too. This evidence indicates that many multinational rms in both years borrowed
a large amount of funds from banks and used it for multinational
business activities such as foreign direct investment and foreign
subsidiaries. Also, the undiminished multinationality even in the global
nancial crisis year indicates that managers in Korean manufacturing
rms tended to recognize the importance of multinationality and used
it to overcome the crisis.
Korea experienced a global nancial crisis in 2008, and many Korean rms went bankrupt during the year. So, our initial expectation
was that rms would have engaged in fewer multinational business
activities in 2008, and thus the eect of MI in that year would also be
reduced compared to other years. Multinationality would not be
valuable in a global economic crisis. However, unlike our expectation,
the eect of multinationality in 2008 (17,559) was greater than other
3 years including 2004 (11,726), 2006 (16,959), and 2007 (16,798).
Investigating why multinationality increased in 2008 using all Korean-listed manufacturing rms, we look into whether multinationals
became more domestics (or less multinationals) in this year. Interestingly, we nd that, despite the global economic crisis, the number of
multinational rms increased by 6.6 per cent (from 196 rms in 2007
to 209 rms in 2008), but the number of domestic rms increased by
only 0.7 per cent (from 401 rms in 2007 to 404 in 2008). The result
indicates that newly entered rms in 2008 expanded multinational business in that year, supporting increased multinationality. One possible
explanation is that after Korean rms have experienced a nancial
crisis in 1997, they learn to manage a crisis. During the global economic crisis, Korean government launched a variety of stimulus and
encouraged exporting to China (Choi et al., 2010). So, many rms
could take advantage of the aids of the government and thus lead
increased multinationality.
Kim (2009) nds that the number of subsidiaries (SUB) and nations
(NAT) each has U-shaped relationship with return on assets, but foreign
sales (FSTS) have an inverted U-shaped relationship with return on
assets. Our ndings contrast with his results: We do not nd any signicant relationship with the two measures FATA and FSTS, but we do
nd it has linear positive relationships with SUB and NAT measures.
Our ndings are consistent with a study of multinationality in the
Netherlands, a nation in Europe which has a small population and
142
geographic size (Vermeulen and Barkema, 2002). They also nd that the
number of foreign subsidiaries has a positive relationship with return on
assets. In the case of Swiss multinational rms, Ruigrok et al. (2007)
nd that internationalization has an S-shaped relationship with performance. An S-shaped relationship of multinationality with performance
is also supported by studies in Taiwan (Chiang and Yu, 2005) and India
(Pattnaik and Elango, 2009). The similar results in other countries
suggest that the benets of internationalization in small market economies exceed the additional costs of higher levels of multinationality.
5. Conclusions
The purpose of this study is to measure the valuation eect of multinationality for Korean rms and to identify the role of multinationality
as it aects intangibility and stock price as proposed by internalization
theory. Managers of multinational rms must answer the question of
whether overseas expansion would result in improved performance or
valuation, and thus the question has long been studied by scholars of
international business and international management (Oesterle and
Wolf, 2011). Previous studies have reported inconsistent results
depending on the theories on which they are based, the methods used
to measure multinationality, and the countries studied. For Korean
rms, several empirical attempts have been made to identify the relationship between multinationality and performance. However, very
little is known about the relationship between multinationality and valuation, which is the motivation of this study. The valuation eect of
multinationality is particularly important because Korea has successfully transformed to a developed economy with multinational business
and achieved high economic growth in a short period. Also, Korea has
particular contextual characteristics: It is located between two large
countries, China and Japan; it has made a commitment to improve the
competitiveness of manufacturing rms with exporting; and it has
overcome a currency crisis and a global nancial crisis. Thus, adding
to the many studies on multinationality that have focused on U.S.
rms and that have employed accounting measures, this study in the
Korean context uses Ohlsons valuation method to provide investors
with useful information.
We primarily hypothesize that the market positively values the
multinational activities of Korean rms, which are operating in a small
market in which rms have strong motivations to internationalize. We
143
utilize Ohlsons (1995) value model and test the eects of multinationality not only by comparing valuation between multinational rms and
domestic rms, but also by estimating the incremental valuation eect
of multinationality after controlling for book value per share, earnings
per share, rm size, and leverage. We provide supporting evidence of
the hypothesis with ndings that a signicant and positive relationship
exists between Korean rms multinationality and rm valuation. The
result is robust with Tobins q measure as well as across the years from
2003 to 2009. We also nd that Korean rms do not reduce their
investments in multinationality in a global nancial crisis, as seen in
the year 2008. The results imply that multinationality in the Korean
context has maintained its importance and played a key role in overcoming the global crisis.
Based on internalization theory, we further hypothesize that multinationality mediates the relationship between intangibility and rm
value. However, we do not nd supporting evidence for an indirect
eect of intangibility on stock price through multinationality, nor for
a direct eect on stock price. Also, we do not nd supporting evidence
for a moderating eect of multinationality on the relationship between
intangibility and stock price. We nd that multinationality inuences
stock price directly and intangibility inuences stock price after controlling for multinationality. These ndings are robust with Tobins q.
Thus, the result indicates that managers in Korean multinational rms
recognize multinationality as a main strategy independent of intangibility, such as in R&D and advertisement.
This study provides evidence of the positive relationship between
multinationality and rm valuation in Korean rms and that multinationality has a direct eect on rm value, independent of intangibility.
Further studies should focus on the trajectory of multinationality and
its eect on rm value. Another interesting extension of this study
would be to examine the comparative eects of multinationality in
rms across several countries. For instance, we may compare the motivations and eects of Korean multinational rms in the United States
with those of U.S. multinational rms in Korea.
Acknowledgements
This paper was supported by international collaborative research funds
of Chonbuk National University in 2009.
144
Notes
1. This theory was proposed by Coase (1937) and further developed by Caves (1971),
Dunning (1973), Williamson (1975), Buckley and Casson (1976), and Rugman (1981).
Refer to Buckley and Casson (2009) for a complete review of the development of internationalization theory.
2. See, for example, Agmon and Lessard (1977), Errunza and Senbet (1981, 1984), and
Fatemi (1984).
3. Indeed, there is ample theoretical and empirical evidence that it is more dicult for
shareholders to monitor managerial decisions with a more complex corporate structure
(see Jensen and Meckling (1976), Demestz and Lehn (1985), and Doukas (1995), among
others.)
4. In a similar vein, Glaum and Oesterle (2007) argue that the size of the rms home
market is one determinant of the multinationality-performance relationship. Supporting
empirical evidences is provided by Ruigrok et al. (2007) for Swiss rms and by Elango
and Sethi (2007) for rms originating in one of 14 small open economies (Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom) and two large economies with modest trade (United States and Japan).
5. Earnings as reecting factors that aect stock price needs to be distinguished from
earnings as conveying information to the stock market (Watts and Zimmerman, 1986,
p. 39). Earnings announcements, the way it is, can aect stock price, conveying information content. Stock price at 3 months after the end of the scal year can exclude the
conveying information eect if the day is not earnings announcement day.
6. For a substantial review of a generalized linear mixed-eects model, refer to Fitzmaurice et al. (2004, pp. 325339) and Wooldridge (2010, pp. 281315).
7. There are two ways of sampling methods: First, rms that are multinational in any
of the 7 years are classied as multinational rms, and rms that are domestic in any
of the 7 years are classied as domestic rms. This sampling method can reect more
realistic situation of the economy because some rms become multinational and some
rms become domestic rms during the period. Second, rms that keep multinational
over the whole period are classied as multinational rms, and rms that keep domestic
over the whole period are classied as domestic rms. This sampling method can provide homogeneity of two groups. Between two ways of sampling methods, we use the
former sampling method. The number of multinational rms is 265 and the number of
domestic rms is 393, but the number in the total sample is not 658 but 552, because
some (106 rms) multinational rms were domestic rms before they became multinational rms. For each multinational rm, a domestic rm that corresponds to the same
industry and year and has the close propensity is matched to the company.
8. Although this sampling method can reect realistic economic situation of an economy, it might not separate the eect of multinationality from the eect of entryexit.
9. Won is the Korean currency unit. The average exchange rate of Korean won during
2003 to 2009 was 1,090 won to 1 dollar.
10. We conduct Breusch-Pagan (1980) Lagrange Multiplier (LM) test to identify a random eect model or a pooling regression model. The chi-statistics for Model 3 and
Model 4 are 2,199 and 1,115, respectively. The result suggests that a random eect
model is appropriate between them. In other models, the chi-statistics are statistically
signicant.
q
11. The formula is sab s2a b2 s2b a2 ; where s2a is the variance of the a coecient and
s2b is the variance of the b coecient.
145
12. Dalal and Zickar (2012) document that mean-centering does not reduce essential
collinearity but non-essential collinearity. They also document that mean-centering does
not change the t of regression models and the power to detect moderating eects.
Thus, we do not mean-centering on this test.
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Value Relevance of Multinationality: Evidence From Korean Firms

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Journal of International Financial Management & Accounting 26:2 2015

Value Relevance of Multinationality: Evidence

Wallace N. Davidson III

Sangno Lee, Minho Kim and Wallace N. Davidson III

contradictory results. Some studies have reported a positive relationship

Value Relevance of Multinationality

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

Sangno Lee, Minho Kim and Wallace N. Davidson III

incremental valuation eects of multinationality. The results are robust

2. Theoretical Background and Hypotheses Development

Value Relevance of Multinationality

reap the benets of international diversication if capital markets are

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

Sangno Lee, Minho Kim and Wallace N. Davidson III

2.3. The Multinationality of Korean Firms

Olsen and Elango

Garrod and Rees

Eckert et al. (2010)

Capar and Kotabe

Ferris et al. (2010)

Author(s) and year

Table 1. Studies on Multinationality of Non-U.S. Firms

Firm size and age

Foreign sales to total

There is valuation dierence

Industrial diversication alone

Value Relevance of Multinationality

2015 John Wiley & Sons Ltd

2015 John Wiley & Sons Ltd

Pan et al. (2010)

A rms revenue from

Author(s) and year

Firms having higher Tobins q

For country diversication,

Value Relevance of Multinationality

Sangno Lee, Minho Kim and Wallace N. Davidson III

2.4. Studies on Multinationality in Korea

Value Relevance of Multinationality

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

2.5. Reconsideration of Internalization Theory

Sangno Lee, Minho Kim and Wallace N. Davidson III

Value Relevance of Multinationality

Table 2. The Firm Performance Measures and Their Rationale

Prot growth and

Weill and Vitale (2002)

Jarvenpaa and Ives (1990)

Garrod and Rees (1998)

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

Sangno Lee, Minho Kim and Wallace N. Davidson III

scal year, so the time is required for the information to be reected in

where MULTI = multinational or domestic rm (multinational = 1

Value Relevance of Multinationality

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

Priceit1 b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit

Priceit1 b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit

Priceit1 b0 b1 BPSit b2 EPSit b3 Sizeit b4 Leverageit

3.2. Measurement of Multinationality

Sangno Lee, Minho Kim and Wallace N. Davidson III

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

Value Relevance of Multinationality

Sangno Lee, Minho Kim and Wallace N. Davidson III

Value Relevance of Multinationality

Table 3. Descriptive Statistics