Corporate Diversification, Managerial Expansion, Firm Liquidity and Operating Performance: The Role of Segment Disclosure

Abstract

We investigate the association between corporate international diversification and operating and market performance and firm spread (liquidity). We find, as expected, that foreign fixed assets of US firms are significantly and positively related to firm performance as measured by operating income, cash from operations, and liquidity. This evidence suggests that corporate international diversification reflects a unique dimension that is incremental to operating and market performance. Foreign fixed assets also are significantly and positively related to prices and returns, suggesting that foreign investments are wealth changing corporate decision. This finding not only complements our operating performance results and price regressions findings, but also suggests that a portion of US firms’ investment abroad is timely. Our inferences are robust to change specifications and controlling for previously identified determinants of spread, operating and market performance. Our price and return results suggest that investors incorporate geographic segmental assets data in their valuation model. Extending the analysis on partition sample — high versus low leverage firms, we document that both foreign assets of high and low leverage firms are significantly positively associated with share price and the coefficient on high leverage firms is significantly larger than the coefficient on low leverage firms.

Keywords: Corporate diversification; firm spread (liquidity); managerial expansion; operating and; market performance

JEL Classification: M41, G14