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Determinants of Capital Structure for Japanese Multinational and Domestic Corporations


  • * Special thanks to Tom Smith, participants at the 2005 AFAANZ conference and Bruce Grundy (editor) for comments and suggestions on earlier drafts.

Barry Oliver
School of Finance and Applied Statistics
Faculty of Economics and Commerce
Australian National University
Canberra, 0200


Our study examines whether there are systematic differences in standard leverage determinants for a sample of Japanese multinational (MNCs) and domestic corporations (DCs). We find that on a univariate basis Japanese MNCs differ significantly on most variables relative to Japanese DCs. These variables include leverage, age, collateral value of assets, free cash flows, foreign exchange risks, growth, non-debt tax shields, political risks, profitability and size. Business risks are not found to be significantly different between the two groups of organizations. When modeling capital structure and the determinants of capital structure we find that Japanese multinationals have significantly less leverage than Japanese DCs, and that multinationality is an important aspect of leverage for Japanese firms. We find that business risks are not significant for modeling capital structure of domestic firms but they are for multinationals and foreign exchange risks are not significant for multinationals but are significant for domestic firms. Business risks are negatively related to leverage for multinationals and we document that significant positive leverage effects of foreign exchange risks and size are subsumed by the negative effect of business risks to explain the lower leverage experienced by Japanese multinationals relative to Japanese DCs. The lack of significance of foreign exchange risks for DCs can be explained by economies of scale in risk management, such as derivatives. Domestic firms seem to manage increased foreign exchange risks through lower leverage rather than derivative use. On the other hand, the larger multinationals can take advantage of economies of scale in risk management. Consequently, foreign exchange risks of multinationals can be managed through derivatives and other risk management operations and not reduced leverage.