A Multinational Perspective on Capital Structure Choice and Internal Capital Markets
Mihir A. Desai,
C. Fritz Foley and
James Hines ()
No 9715, NBER Working Papers from National Bureau of Economic Research, Inc
This paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of American multinational corporations. The evidence indicates that 10 percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios of American-owned affiliates, and that borrowing from related parties is particularly sensitive to tax rates. Borrowing by American affiliates responds to local inflation and political risks, and is more costly in countries with underdeveloped capital markets and those providing weak legal protections for creditors. Affiliates in environments where external borrowing is costly borrow less from unrelated parties: one percent higher interest rates are associated with 1.4 to 2.0 percent less external debt as a fraction of assets. Instrumental variables analysis reveals that affiliates substitute loans from parent companies for between half and three quarters of the reduced borrowing from unrelated parties stemming from adverse local capital market conditions. These patterns suggest that multinational firms are able to structure their finances in response to tax and capital market conditions, thereby creating opportunities not available to many of their local competitors.
JEL-codes: G32 H25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-pbe
Note: CF ITI PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18) Track citations by RSS feed
Published as Desai, Mihir A., C. Fritz Foley and James R. Hines, Jr. "A Multinational Perspective On Capital Structure Choice And Internal Capital Markets," Journal of Finance, 2004, v59(6,Dec), 2451-2487.
Downloads: (external link)
Journal Article: A Multinational Perspective on Capital Structure Choice and Internal Capital Markets (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9715
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().