College

College of Business (Strome)

Department

Finance

Graduate Level

Doctoral

Presentation Type

Oral Presentation

Abstract

Conflicting results in the literature regarding the effect of internationalization on firm performance motivate this study to examine this effect through an important but less studied channel. Unlike previous literature mainly focusing on the impact of internationalization on firm financial performance, this study examines operational performance and probes how internationalization affects firms’ investment inefficiency, thus demonstrating an important aspect in determining the success of international strategies. By applying the concepts of transaction cost economics and agency theory to a sample of US firms between 1989 and 2022, we find evidence that internationalization has a positive relationship with investment inefficiency and a negative relationship with firm value. By examining firm and industry characteristics, our results suggest that higher international experience, lesser competition in the industry, and being in the growth or mature stages of the firm life cycle mitigate the positive relationship between internationalization and investment inefficiency. Among firms pursuing internalization, we find results indicating that financial constraints increase underinvestment, whereases agency costs exacerbate overinvestment. Our results remain consistent after a battery of robustness tests.

Keywords

investment inefficiency, internationalization, firm performance, international diversification, overinvestment, underinvestment, information asymmetry.

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Internationalization and investment efficiency

Conflicting results in the literature regarding the effect of internationalization on firm performance motivate this study to examine this effect through an important but less studied channel. Unlike previous literature mainly focusing on the impact of internationalization on firm financial performance, this study examines operational performance and probes how internationalization affects firms’ investment inefficiency, thus demonstrating an important aspect in determining the success of international strategies. By applying the concepts of transaction cost economics and agency theory to a sample of US firms between 1989 and 2022, we find evidence that internationalization has a positive relationship with investment inefficiency and a negative relationship with firm value. By examining firm and industry characteristics, our results suggest that higher international experience, lesser competition in the industry, and being in the growth or mature stages of the firm life cycle mitigate the positive relationship between internationalization and investment inefficiency. Among firms pursuing internalization, we find results indicating that financial constraints increase underinvestment, whereases agency costs exacerbate overinvestment. Our results remain consistent after a battery of robustness tests.