Value of Multinationality: Internalization, Managerial Self-interest, and Managerial Compensation

In this paper, we examine the impact of managerial self-interest on the value of multinationality. Since agency theory also suggests that a divergence between the interests of managers and shareholders can be aligned by effective managerial incentive, we also examine the effect of managerial compensation on the value of multinationality. Our results show that for high-"Q" (Tobin's "Q > 1") firms, investors do not associate the spending of free cash flow on multinationality with the problem of overinvestments. For high-"Q" firms, it is also found that the value of multinationality can be enhanced by effective managerial incentives. For low-"Q" firms (Tobin's "Q > 1"), it is found that the concern of managerial self-interest overwhelms the benefits of internalization, making multinationality a value-decreasing event. For low-"Q" firms, managerial compensation is also ineffective in promoting value-enhancing foreign direct investments. Copyright Blackwell Publishers Ltd 2002.