Impact of Corporate Internationalization on the Value Relevance and Informativeness of Earnings －Based on the Disclosure Information on Foreign Subsidiaries－
Asian Tax Journal Vol. 19 No. 4 (2018), pp. 129-154
Abstract
This study measures the level of internationalization of Korean firms based on the corporate disclosure on foreign subsidiaries, and thereby investigates its effect on the long－term value relevance and the market reaction to earnings announcements. The new measure of corporate internationalization utilizes the detailed information on the location and assets for subsidiaries available under the consolidated financial statements since 2011. The empirical test results using the new measure of internationalization show that firms with higher portion of assets held by foreign subsidiaries have higher value relevance of earnings in the long run. Further, the market response to earnings announcements are also higher for firms with higher level of internationalization. Further, the value relevance and the informativeness of earnings announcements are more pronounced where the foreign subsidiaries of the sample firms are located in highly developing countries, which implies that the market participants highly appreciate the growth of business opportunities in foreign countries and accordingly the income generated in those countries. Additional detailed analysis using the degree of dispersion of corporate assets across the world shows also similar results. This study has contributions in that it provides an improved methodology to measure the degree of internationalization of Korean firms and further support the corporate strategy for foreign investments by clarifying the positive market response to the internationalization. Further, this study verifies the usefulness of the information on foreign subsidiaries for the corporate disclosure policy and highlights the need of considering the foreign country characteristics for the relevant studies in the future.
Keywords
- foreign subsidiary
- internationalization
- value relevance
- earnings announcement
- economic growth
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