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Systematic Risk of the Multinational Corporation


Previous literature suggests that multinational firms decrease their systematic risk owing to the diversification benefit of having cash flows in different countries. It is posited in this article that multinational firms may increase their systematic risk owing to an increase in the standard deviation of cash flows from internationalization, which offsets the lower correlation associated with diversification. Evidence of a significant positive relationship between the level of systematic risk in a firm and the degree of that firm's internationalization is presented. This analysis is consistent with observed practitioner usage of higher discount rates in evaluating international projects.

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*David M. Reeb was on the faculty at WPI (Worcester Polytechnic Institute) in 1996–1998. In Fall 1998, he joins the American University as an Assistant Professor of International Business. His primary areas of research are capital structure in the multinational corporation, cost of capital and value creation in the MNC, and financial distress costs under different governance structures

**Chuck C.Y. Kwok is a Professor of International Business at the Llniversity of South Carolina. His research concentrates on international financial management and international business education, with a geographical interest in the Pacific Rim. He was the Vice President-Administration of the Academy of International Business in 1995-1996.

***H. Young Baek is a doctoral candidate at the University of South Carolina with a concentration in international finance. His primary research interest lies in the area of international corporate finance.

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Reeb, D., Kwok, C. & Baek, H. Systematic Risk of the Multinational Corporation. J Int Bus Stud 29, 263–279 (1998).

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