Cultural distance and valuation of multinational corporations

We examine the value impact of cultural differences that exist between the foreign subsidiaries and the headquarters of U.S. Multinational corporations (MNCs). We find a negative relationship between cultural distance and firm valuation. Specifically, in addition to the cultural distance index, which is a composite measure of cultural differences, most of the individual cultural attributes that make up the index have a negative effect on firm valuation. Our findings are consistent with the notion that cultural differences decrease firm value by imposing a barrier to the exploitation of internalization advantages. Our results remain robust when we use orthogonal cultural distance measures and various multivariate methodologies. (C) 2006 Elsevier B.V. All rights reserved.