Cost of Capital in an International Context: Institutional Distance, Quality, and Dynamics

Thomas Lindner, Jakob Muellner and Jonas Puck

Journal of International Management, 2016, vol. 22, issue 3, 234-248

Abstract: Cost of debt is a key cognitive anchor for managerial decisions and an important determinant of firm profitability. We extend international management research by analyzing the effects of institutional distance, institutional quality, and their dynamics on the cost of debt in the context of foreign direct investments (FDI). We test our conceptual model on a sample of companies making 3764 greenfield foreign direct investments from developed into less developed markets. Using hierarchical linear modeling, we show that the financial consequences of internationalizing into countries with weak institutions depend on both the institutional distance between countries, as well as their institutional quality. Furthermore, we find that recent changes in institutional quality form expectations about future development and ultimately influence post-investment financing costs.

Keywords: Cost of debt; Trade-off theory; Institutional perspective; Foreign direct investments; Developing countries (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intman:v:22:y:2016:i:3:p:234-248

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DOI: 10.1016/j.intman.2016.01.001

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