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A Multinational Perspective on Capital Structure Choice and Internal Capital Markets
Author(s) -
DESAI MIHIR A.,
FOLEY C. FRITZ,
HINES JAMES R.
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00706.x
Subject(s) - multinational corporation , capital structure , business , debt , monetary economics , capital market , capital (architecture) , financial capital , physical capital , capital intensity , external debt , financial system , economics , market economy , finance , human capital , archaeology , history
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.