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This paper examines whether a firm's financial performance (FP) is associated with superior environmental, social and governance (ESG) scores in emerging markets of multinationals in Latin America. The study addresses the current research gap on this issue; it develops hypotheses and tests them by applying linear regressions with a data panel drawn from the Thomson Reuters Eikon™ database to analyse data on 104 multinationals from Brazil, Chile, Colombia, Mexico and Peru between 2011 and 2015. The results suggest that the relationship between the ESG score and FP is significantly statistically negative. Furthermore, in examining environmental, social and governance separately to accurately determine each variable's relationship to multilatinas' FP, the results reveal a negative relationship. Finally, the empirical analysis provides evidence for a moderating effect of financial slack and geographic international diversification on the relationship between ESG dimensions and firms' FP. This study furthers understanding of the relationship between ESG dimensions and FP for the Latin American business context.

The resource-based view on firm diversification, subsequent to Penrose (1959), has focused primarily on the fungibility of resources across domains. We make a clear analytical distinction between scale free capabilities and those that are subject to opportunity costs and must be allocated to one use or another, thereby shifting the discourse back to Penrose's (1959) original argument regarding the stock of organizational capabilities. The existence of resources and capabilities that must be allocated across alternative uses implies that profit-maximizing diversification decisions should be based upon the opportunity cost of their use in one domain or another. This opportunity cost logic provides a rational explanation for the divergence between total profits and profit margins. Firms make profit-maximizing decisions to increase total profit via diversification when the industries in which they are currently competing become relatively mature. Due to the spreading of these capabilities across more segments, we may observe that firms' profit-maximizing diversification actions lead to total profit growth but lower average returns. The model provides an alternative explanation for empirical observations regarding the diversification discount. The self-selection effect noted in recent work in corporate finance may not be indicative of inferior capabilities of diversifying firms but of the limited opportunity contexts in which these firms are operating.

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors neglect tail risks.

Household investment mistakes are an important concern for researchers and policymakers alike. Portfolio underdiversification ranks among those mistakes that are potentially most costly. However, its roots and empirical importance are poorly understood. I estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables. Nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes. Compared to these groups, households with below-median financial literacy that trust their own decision-making capabilities lose an expected 50 bps on average. All group differences stem from the top of the loss distribution.

Though we have had extensive theoretical and empirical studies on diversification during the past decades, yet the impact of diversification on a firm’s financial performance remains unclear. Earlier, authors (like Arnould, 1969; Berry, 1971; Gort, 1962) tried to answer the fundamental question of ‘whether a firm should diversify or not’, but were unable to reach any consensus. Rumelt (1974) categorized diversification into related and unrelated and concluded that diversification in a related area is better than being undiversified. Even after the seminal work of Rumelt, empirical evidence on the impact of both types of diversification on a firm’s financial performance is still mixed (Berger & Ofek, 1995; Chen & Joseph Yu, 2012; Duin & Hansen, 1991; Palepu, 1985; Palich, Cardinal, & Miller, 2000). In this study, we make an attempt to answer the same fundamental question of ‘whether a firm should diversify or not’ by including three new aspects: first, we measure the impact of diversification (and its types) on the three aspects of a firm’s financial performance, that is, risk, return and risk-adjusted return; second, we measure this impact on lag 1 of diversification; and third, we use a newly developed approach, that is, correlation-based diversification measures (Nigam & Gupta, 2018b) to measure different types of diversification. Initially, our results indicated insignificant impact of diversification (and its types) on all firm performance measures. Later, we segregated related diversification (RD) into positive related diversification (PRD) and negative related diversification (NRD); then we measured the impact of each type of diversification separately and found that diversification is better than being undiversified only if it is into a negative related area. It is a new finding and may have some policy implications for the management while designing its diversification strategy.

The COVID-19 pandemic has led to economic and health crises (“twin crises”) worldwide. Using a sample of firms from 73 countries over the period January to December 2020, we examine stock price reactions of multinational corporations (MNCs) and purely domestic companies (DCs) to the crisis. We find that, on average, MNCs suffer a significantly larger decline in firm value relative to DCs during the stock market crisis caused by the pandemic with notable heterogeneity in this underperformance across both industry and region. The evidence of MNC underperformance is robust to using abnormal returns, an alternative crisis window, a matched sample that accounts for differences in characteristics between MNCs and DCs, alternative model specifications, and alternative proxies for multinationality. Further analysis on the effect of government responses on the valuation gap suggests that stringent government responses exacerbate MNCs’ underperformance. Finally, we show that a stronger financial system mitigates negative crisis returns, especially under stringent government responses, while real factors, such as the firm’s supply chain, investments in human capital, research and development, exacerbate negative crisis returns. Our findings have important implications for managers of MNCs and government policymakers alike and contribute to studies on the international diversification–performance relation by demonstrating a dark side of globalization during a tail-risk event.

This paper studies the relation between corporate liquidity and diversification. The key finding is that multidivision firms hold significantly less cash than stand-alone firms because they are diversified in their investment opportunities. Lower cross-divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash flow volatility. The effects are strongest in financially constrained firms and in well-governed firms, and correspond to efficient fund transfers from low-to high-productivity divisions. Taken together, these results bring forth an efficient link between diversification and corporate liquidity.

We examine firm value and performance implications of the growing trend of nontechnology companies engaging in activities relating to digital technologies. We measure digital activities in firms based on the disclosure of digital words in the business description section of 10-Ks. Digital activities are associated with a market-to-book ratio 8%–26% higher than industry peers, and only 25% of the differences in market-to-book is explained by accounting capitalization restrictions. To control for selection bias, we implement lagged dependent variable and IV regressions, and our market-to-book findings are robust to these specifications. Portfolios formed on digital activity disclosure earn a Daniel et al. The Journal of Finance 52 (3): 1035–1058 ( 1997 )-adjusted return of 30% over a three-year horizon and a monthly alpha of 44-basis-points. On the other hand, we find weak evidence of near-term, positive improvements in fundamental performance, as we find some evidence of interim productivity increases but declines in sales growth conditional on digital activities.

The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries.

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two new identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduced BHC valuations. We also find that the geographic diversification of BHC assets increased insider lending and reduced loan quality. Taken together, these findings are consistent with theories predicting that geographic diversity intensifies agency problems.