THE IMPACT OF OVERSEAS OPERATIONS ON THE U.S. MARKET RISK OF MULTINATIONAL COMPANIES

The study examines the impact of a multinational firm's foreign operations on its systematic equity risk (beta). Beta is computed for a sample of multinational firms using the market model regression and is then regressed on the firm's foreign sales characteristics. The results indicate that a firm's foreign operations positively relate to its systematic equity risk in terms of both total and regional foreign sales. This is contrary to international portfolio diversification theories, which state that investing in multinational firms reduce an investor's exposure to movements in the U.S. market. This paper demonstrate that investors do not view multinational firms as vehicles for international diversification.