The Operational Hedging Properties of Intangible Assets: the Case of Non-voluntary Foreign Asset Selloffs

In this paper we examine the valuation effects and long-term performance of U.S. multinational firms involved in forced transfers of their foreign operating assets during the 1965-1988 period. The evidence suggests that the operational hedging ability of the firm to address country risk (nationalization threats) is related to the level of its intangible assets. While it is well known that firms with high levels of intangible assets prefer foreign direct investment, our results show that intangible assets have hidden properties of protection against country risk as well. We document significantly negative abnormal returns only for divesting firms with low levels of intangible assets, but not for firms with high levels of intangible assets. In addition, we show that low (high) growth firms are involved in partial (complete) withdrawals, and show that the long-term economic performance of firms choosing the complete withdrawal strategy is better than those that opt to remain. We argue that management's attempt to maintain economic links in a hostile foreign environment can be attributed in part to the firm's low growth opportunities, performance, and lack of contingent plans to address country risk. * Department of Finance, Stern School of Business, New York University, New York, NY 10012, School of Business and Public Administration, Old Dominion University, Norfolk, VA 23529-0218, and Distinguished Senior Research Fellow, Cardiff Business School, Cardiff, UK,e-mail:[email protected], Tel: (212) 998-0432, and the Finance Department, San Diego State University, San Diego, CA 92182, respectively. We are grateful to Mark Flannery, Paul Seguin and Rene Stulz, and two anonymous referees for their helpful comments.