Internationalization and the Cross-section of Stock Returns: Evidence from Multinational Corporations Publicly Listed in the U.K

The link between internationalization and firm performance is a key issue in
international business research. This paper thus proposes two main opposing channels
through which the degree of internationalization affects stock returns for multinational
corporations (MNCs). In particular, MNCs can benefit from risk reduction through
international diversification, yet may be exposed to more risk factors in international
markets. Using a sample of 566 MNCs publicly listed on the London Stock Exchange
(LSE) during 1999 and 2015, this paper finds that the degree of internationalization
positively and significantly correlates to the cross-section of stock returns in all
Fama-MacBeth regressions, even after accounting for beta, size, book-to-market, leverage,
momentum, and product market competition. In addition, the interaction term between
product market competition and internationalization is significantly negative. The results
indicate that firms or industries with a higher degree of internationalization earn, on
average, higher risk-adjusted returns, but only in less competitive industries.