Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty

Masaaki Kijima and Yuan Tian ()

Decisions in Economics and Finance, 2013, vol. 36, issue 2, 169-197

Abstract: This paper examines the impact of international debt shifting and exchange rate uncertainty on investment and capital structure decisions of foreign subsidiary. We find that debt shifting induces earlier investment, earlier default, higher leverage, and larger ex ante firm value of foreign subsidiary. When debt shifting is not so costly, the optimal leverage of foreign subsidiary increases as the tax rate differential increases. Moreover, when the correlation between exchange rate and foreign cash flow uncertainties is positive (negative, respectively), foreign investment advances as exchange rate uncertainty increases (decreases) as well as the correlation increases. These results reveal that the impact of debt shifting and exchange rate uncertainty on investment and capital structure policies cannot be ignored, supporting existing empirical findings. Copyright Springer-Verlag 2013

Keywords: Multinational companies; Foreign direct investment; Debt shifting; Real options; F31; F34; G11; G33 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10203-012-0129-3

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