Effects of ownership structure on the relationship between multinationality and downside risk

Abstract

Purpose The purpose of this paper is to explore how multinationality affects multinational companies’ (MNCs) downside risk and the moderate effects of ownership structure in the setting of emerging markets based on Chinese publicly traded manufacturing MNCs. Design/methodology/approach The author derives hypotheses based on real options theory and agency theory, and tests hypotheses by using Tobit model and a unique data set of Chinese A-shared publicly traded manufacturing MNCs in the period of 2010–2016. Findings The empirical results suggest that multinationality is positively related to downside risk and this effect is subjected to ownership structure for firms in emerging markets. In particular, multinationality of MNCs with a high level of ownership concentration, managerial ownership and institutional ownership is more likely to reduce downside risk. Practical implications The main conclusion of this paper highlights the importance of ownership structure of MNCs in explaining the real options value of multinationality, and conveys to owners of MNCs in China and other emerging markets the need to strengthen firms’ governance if they want to maximize the benefits of multinational operations. Originality/value This study extends existing studies by taking ownership structure into consideration and highlighting the importance of agency problem in the examination of multinationality and downside risk, which provides a potential explanation for previous mixed evidence. This study also provides new evidence for the relationship between multinationality and downside risk by using a unique sample from China, an emerging market country.

Enjoying or refraining from risk? The impact of implicit need for achievement and risk perception on SME internationalization

“…Given the specific distribution of our dependent variable, we applied the left and right-censored Tobit regression model. Tobit models are commonly used to study censored data and are more powerful than many other regression models in these cases (Saeed et al, 2017;Zhou, 2019).…”

“…Given the specific distribution of our dependent variable, we applied the left- and right-censored Tobit regression model. Tobit models are commonly used to study censored data and are more powerful than many other regression models in these cases (Saeed et al , 2017; Zhou, 2019). We performed a hierarchical Tobit procedure with robust standard errors involving a curvilinear effect of risk perception on the relationship between n Achievement and FSTS (Dawson, 2014).…”

CEO characteristics, multinationality and downside risk: evidence from Chinese multinational corporations

“…As the development of real options theory is based on MNCs engaged in manufacturing (Kogut and Kulatilaka, 1994), this study focuses on these kind of firms. Existing research suggests that owning overseas subsidiaries is a key feature of MNCs (Zhou, 2019). Information about foreign operating subsidiaries of A-share listed Chinese manufacturing firms from their annual financial reports is collected in this study.…”

“…Extant literature suggests that the real option’s key contribution is that it offers the holder a right against downside risk (Bowman and Hurry, 1993). Thus, downside risk is taken as a dependent variable while investigating the implications of the real options theory on multinationality (Miller and Leiblein, 1996; Zhou, 2019). Particularly, this study specifies the Downside Risk using the following equation: where IROA i,t-1 represents firm i’s target performance level, measured as the average return on assets (ROA) for all firms in the same two-digit industry as firm i in the t-1th year, and ROA i,t represents firm i’s ROA in year t .…”

“…If a government agency is the ultimate controller of a firm, then the State has a value of one and zero, otherwise. Firm size . This study controls for firm size because larger firms may have more resources to deploy internationally, and thus, have a greater buffer against downside risks (Zhou, 2019). Firm size was measured as the natural logarithm of total assets. Slack .…”