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Séminaires de Gestion
Foreign Profitability and
Dividend Policy
Robert JOLIET
FNRS Research Fellow
Université de Liège
Multinational Firms & Segmental Financial
Performance
• Typically, the long-term growth rate of a project will be
highly correlated with economic growth in the country,
specially in the long-run and according to the firm’s
business.
Percentage profitability and earnings vary from one
country to another. A relatively “low” profitability in one
country might be acceptable in a different one.
International diversification smoothing effect vs. specific
regional effect.
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The Value of Foreign Operations
Operations in different countries present the firm with
different costs, barriers, political climates and legal
restrictions  Operating regions/countries usually
experience varied rates of profitability, risk and growth.
Valuation likely varies depending upon the location of the
operations  disaggregation needed
 A geographical breakdown of firms’ operations may
provides investors with useful information.
Investors may not fully understand the benefits and risks
involved in the heterogeneous foreign operations tend to
underestimate the persistence of foreign earnings.
 IS THERE INTERACTION WITH DIVIDEND POLICY ?
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The Effect of Segmental Profitability on
Stock Returns
Corporate Profitability is an essential key component in
the computation of the cost of equity.
Expected Dividend Yield
Future Growth Rate
for a multinational firm i, operating in n foreign region j
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The Effect of Segmental Profitability on
Stock Returns (2)
Assuming a changing profitability
associated with
forthcoming projects
associated with
existing projects
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Dividend Yield & Segmental Profitability
Depends on the investment growth opportunities available
(investors’ expectations & agency costs problems)
Signalling effects
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Empirical Analysis
388 firms from North America, Europe, and Australasia
Study on a 10 year period (1993-2003)
Based on incremental regional accounting profitability
(ROIC) with respect to the domestic one (levels and
changes).
Regional and Country-specific analysis
Simultaneous and lagged stock returns, following the
firm’s fiscal year
Dividend-paying stocks vs. Non-dividend-paying stocks
Dividend per share adjusted for stock splits
Year, industry and firm’s nationality (fixed) effects.
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A. Dividend-Paying Stocks
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Empirical Analysis (1) : Dividend-Paying stocks –
Simultaneous Stock Returns & Segmental Profitability
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Empirical Analysis (2) : Dividend-Paying stocks –
Lagged Stock Returns & Segmental Profitability
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Empirical Analysis (3) : Dividend-paying stocks – Lagged Stock
Returns & Segmental Profitability Variation, Dividend Yield
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Empirical Analysis (4) : Dividend-paying stocks – Expected
Dividend Yield & Segmental Profitability
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Empirical Analysis (5) : Dividend-paying stocks –
Past Dividend Yield & Segmental Profitability
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B. Non-Dividend-Paying Stocks
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Empirical Analysis (6) : Non-Dividend-paying stocks –
Simultaneous Stock Returns & Segmental Profitability
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Empirical Analysis (7) : Non-Dividend-paying stocks –
Lagged Stock Returns & Segmental Profitability
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Concluding Remarks
The relation between geographical profitability
and common equity valuation depends on
investors’ expectations and whether a firm pays
dividends.
Dividend Policy seems to give a sign to investors
about the profitability and the investment
opportunities in the different area of
operations.The dividend yield tends to be
pushed down by operating regions/countries
with sustainable growth opportunities.
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Thank you for your attention
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