Unveiling the antecedents of international diversification: An agency theory approach

While various studies have developed hypotheses about the antecedents of international diversification drawing mainly on the resource-based view, the behavioral theory of the firm, and the transaction costs literature, we advance our understanding by investigating the explanatory power of agency costs of free cash flow arguments. Using a sample panel of 167 Italian firms longitudinally evaluated during the 1980-2010 period, this study tests whether the firm’s choice to spread operations in multiple foreign countries is conditioned by excess of free cash flow and debt, especially in firm-contexts where agency problems are exacerbated by managers or large shareholders’ opportunism. We find that debt has a negative effect on international diversification, while, contrary to our expectation, we find that the effect of cash flow is negative. Results also show that both high ownership concentration and low growth opportunities have a significant moderating effect on the debt - and cash flow - international diversification relationships.