Corporate Internationalization and Systematic Risk

This study aims at characterizing the benefits of corporate international diversification on stock values by introducing the notion of psychic distance in the analysis. In order to capture this crucial dimension, we construct a new internationalization index, which outperforms the traditional measures, such as the foreign sales ratio, for homogenous populations of multinational companies. A Hybrid Capital Asset Pricing Model is employed to engage in measuring the relationship between international index and systematic risk by using the sample of top 100 companies listed in Taiwan Stock Exchange during 2000-2005. The results show that the sample companies generally reduce their international exposure by taking into account psychically distant markets. Alternatively, it also demonstrates that the international systematic risk exposure is often dominated by the domestic market risk exposure