How does internationalization affect a firm’s cost of capital? / Pinhathai Thongprasert
33 leaves: tables
Prior research suggests that internationalization is associated with either lower or higher cost of capital. However, no research has comprehensively addressed the endogeneity problems between these two variables. This study highlights several empirical implications based on a sample of 40,367 U.S. firm-year observations. First, using foreign sales to total sales ratio (FSTS), foreign assets to total assets ratio (FATA), and number of geographical segments (NOGEO) as measures of internationalization, the relationship between international diversification and cost of capital were different when diverse internationalization measures were used since different measures capture disparate aspects of internationalization. A higher foreign assets ratio was associated with lower cost of capital, while the relationship was inverse when firms have higher foreign sales ratios or numbers of foreign segments. Results further suggest that target country conditions (i.e. developed and developing countries) play a significant role in the relationship between internationalization and the cost of capital.