The valuation of the foreign income of US multinational firms: a growth opportunities perspective

We demonstrate the value-relevance of foreign earnings for US multinational firms by examining the associations between annual abnormal stock performance and changes in firms' domestic and foreign incomes. For 2570 firm-year observations between 1985 and 1993, both foreign and domestic earnings changes have significant positive associations with annual excess return measures; however, the association coefficient on foreign income is significantly larger than the association coefficient on domestic income. We demonstrate this larger association coefficient for foreign income is consistent with differences in growth opportunities between domestic and foreign operations. (C) 1997 Elsevier Science B.V. All rights reserved.