Corporate International Diversification and Cost of Equity Capital －Focusing on the Roles of Corporate Governance－
Asian Tax Journal Vol. 20 No. 2 (2019), pp. 71-94
Abstract
In this study, we analyze the effect of international diversification strategy on the cost of equity of Korean companies in terms of corporate governance. In addition, this study presents the empirical results of the moderating effects of corporate governance on the effects of corporate diversification strategy on cost of equity capital. The empirical results of this study are as follows. First, the level of international diversification and corporate cost of equity capital, which are measured by the proportion of overseas sales and overseas assets, are positively related to corporate’ cost of equity. Since 2000, the international diversification strategy of Korean companies has been pursued is consistently positive in the aspect of firm risk. This implies that the average of the total risk of the firm increases because the effect of the additional political and agency costs is greater than the effect of reducing the volatility of total corporate profits. Second, good corporate governance shows a significant negative effect on the significant positive relation between the level of international diversification and corporate cost of equity capital. Therefore, good corporate governance plays a positive role in weakening opportunistic behavior of managers and enhancing efficiency in managerial decision making. This moderates effectively the increased firm risk which is measured by corporate cost of equity capital. The results of this study show that Korean companies pursuing international diversification strategies can expect cash flow to increase in the future due to international diversification strategy, but the total risk of enterprises may also increase. However, companies that pursue international diversification strategies will be able to effectively offset corporate risks that may arise from international diversification strategies by firmly establishing good corporate governance.
Keywords
- International Diversification
- cost of equity capital
- corporate governance
- firm risk
Related Articles
An Empirical Study on the Effects of Accounting Quality and Corporate Governance on the Cost of Equity Capital
10(3) 33-72
Firm－level Competition Perceived by a Firm and its Implied Cost of Risk Premium
19(2) 231-255
Corporate Governance and Tax Law
14(2) 81-110
A Study on National Institutional Characteristics and Corporate Social Responsibility
27(2) 43-65
A Study on Corporate Governance Quality and Shareholder Returns：Focusing on Compliance with Key Indicators in Corporate Governance Reports
27(1) 131-171