Effect of Geographical Diversification on Informational Efficiency in Emerging Countries

Abstract

This study investigates the effect of geographical diversification on informational efficiency. Informational efficiency is measured using the price delay measure and is further divided into informational efficiency related to local news and informational efficiency related to global news. Geographical diversification is proxied using four different variables – foreign sales dummy, number of foreign countries, foreign sales ratio and the Herfindahl Index. The sample study involves public listed companies from 12 emerging countries for the period from year 2005 to year 2014. The regression results prove that all four geographical diversification proxies show a positive and significant effect on local price delay. This proves that when a company undergoes geographical diversification, its business structure will become complex. Few investors will focus on a geographical diversified company, which leads to lower informational efficiency. All the regression models in this study are robust to heteroscedasticity and multicollinearity problems. All the geographical diversification proxies remain significant towards local delay when alternative delay measures are used, and financial crisis is controlled by using a crisis dummy.