Corporate diversification and performance evidence on production efficiency.pdf

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Corporate diversification and performance evidence on production efficiency.pdf

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Corporate diversification and performance evidence on production efficiency

J. of Multi. Fin. Manag. 14 (2004) 135–152 Corporate diversification and performance: evidence on production efficiency H. Young Baek ? H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University, 3100 SW 9th Ave, Fort Lauderdale, FL 33315, USA Received 15 September 2002; accepted 10 July 2003 Abstract This study utilizes the COMPUSTAT database to extract 31,002 firm-year observations for the firms publicly traded on US exchanges during the 1995–2001 period, and examines the relationship between corporate international diversification and technical productive efficiency. The parameters of a stochastic frontier function are estimated simultaneously with the firm-specific production inefficiency effects in a panel framework. After controlling for product diversification, industry and firm size, the author finds the degree of international diversification is positively related to production efficiency. The results are robust to the choice of multinationality variables including number of geographic segments, foreign income ratio and foreign tax ratio. In all, the results suggest that multinational corporations are utilizing their operating flexibility. ? 2003 Elsevier B.V. All rights reserved. JEL classification: D24; F23; O32 Keywords: Diversification; Production efficiency; Stochastic frontier 1. Introduction Corporate international diversification and its impact on profitability and firm value have long been interesting research topics. 1 Previous studies have focused on diversification’s ? Tel.: +1-954-262-5103; fax: +1-954-262-3965. E-mail address: hybaek@nova.edu (H.Y. Baek). 1 See, among others, Errunza and Senbet (1981, 1984), Kim et al. (1989), Morck and Yeung (1991), Allen and Pantzalis (1996), Tallman and Li (1996), Hitt et al. (1997), Denis et al. (2002), Mansi and Reeb (2002), and Schoar (2002). 1042-444X/$ – see front matter ? 2003 Elsevier B.V. All rights reserved. doi:10.1016/j.mulfin.2003.07.006 136 H.Y. Baek / J. of Multi.