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A Multinational Perspective on Capital Structure Choice and Internal Capital Markets

Authors

  • MIHIR A. DESAI,

  • C. FRITZ FOLEY,

  • JAMES R. HINES Jr.

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    • Desai is from Harvard University and NBER, Foley is from Harvard University, and Hines is from the University of Michigan and NBER. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce. We thank various seminar participants, the referees, Richard Green, René Stulz, and William Zeile for helpful comments, as well as the Lois and Bruce Zenkel Research Fund at the University of Michigan and the Division of Research at Harvard Business School for financial support.


ABSTRACT

This paper analyzes the capital structures of foreign affiliates and internal capital markets of multinational corporations. Ten percent higher local tax rates are associated with 2.8% higher debt/asset ratios, with internal borrowing being particularly sensitive to taxes. Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditor rights, reflecting significantly higher local borrowing costs. Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three-quarters of reduced external borrowing induced by capital market conditions. Multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets.

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