How taxes impact bank and trade financing for Multinational Firms

Xiangyuan Lu and Zhiqiao Wu

European Journal of Operational Research, 2020, vol. 286, issue 1, 218-232

Abstract: Tax and capital play critical roles in the business of multinational firms. This study investigates the optimal financing strategy between bank credit financing and trade credit financing when a multinational firm invests in a capital-constrained retailer located in a low-tax jurisdiction. We find that tax differences and varying dividend rates have significant effects on a multinational firm's decisions. In a basic model, we show a tax-related dividends rate that is less than one but can eliminate double marginalization in bank credit. In trade credit, we find that the optimal wholesale price changes with tax and dividend rate. When both bank and trade credits are viable, we find that the differences in dividends rates and tax rates are two critical factors in determining the optimal strategy, and we investigate the joint effect of these rates on the optimal financing strategy. When examining the impact of tax asymmetry on both retailers’ and multinational firms’ decisions, under bank credit, multinational firms will reduce the wholesale price to induce higher orders, but they will never offer trade credit. When both bank and trade credits are viable alternatives, the optimal financing strategy is bank credit when tax asymmetry exists. Lastly, the production cost threshold value that separates the unique financing equilibrium is lower due to the impact of taxes. Our findings can offer financing insights to both multinational firms and capital-constrained divisions.

Keywords: Finance; Bank credit; Trade credit; Dividends; Tax asymmetry (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:286:y:2020:i:1:p:218-232

DOI: 10.1016/j.ejor.2020.03.013

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