The Capital Structure of Multinational and Domestic Corporations.

Due to the importance of multinational corporations for global economic growth, studying multinational firms’ capital structure has become important. Theories have been developed to explain the variations between multinational and domestic firms’ capital structure decisions. In this context, empirical research has been conducted to study the capital structure of multinational corporations in comparison to domestic corporations in order to provide theoretical support. However, this group of capital structure literature still requires further investigation in order to enhance our understanding on the difference between the capital structure of multinational corporations compared to domestic corporations.
This thesis provides three empirical studies on the capital structure of US multinational corporations compared to purely domestic corporations. More specifically, the first empirical chapter in this thesis (Chapter 5) aims to give an answer to the puzzling lower leverage ratio of US multinational firms relative to their domestic counterparts. Further, the second empirical chapter in this thesis (Chapter 6) investigates the role of the trade-off theory debt interest tax shield advantage of debt financing between multinational and domestic firms capital structure decisions by looking at the non-linear effect of the firm’s profitability on the capital structure decisions of US multinational and domestic corporations. Moreover, the third empirical chapter in this thesis (Chapter 7) considers the global financial crisis event to test the different expected bankruptcy cost of debt financing between multinational firms and domestic firms (as predicted by the trade-off theory). This is done by comparing the capital structure between US multinational firms and their domestic counterparts during the 2008-2009 global financial crisis.
The thesis provides several contributions to the extant capital structure literature. More precisely, the first empirical chapter finds the first empirical evidence which reports that the effect of the multinational firms’ size on their leverage ratio is significantly lower relative to domestic firms’ size. Further, the first empirical chapter finds that the effect of the firm’s size when comparing the leverage ratio between US multinational corporations and their domestic counterparts, is moderating. These findings support the theoretical explanations of multinational firms’ higher agency cost of debt due to their higher monitoring cost as a result of the complexity of the international environment.
The second empirical chapter in this thesis finds that the effect of multinational firms’ profitability on their leverage ratio is non-linear, while the effect of domestic firms’ profitability on their leverage ratio is negative. The results support the theatrical argument which reports that the debt interest tax shield plays an important role in multinational firms’ capital structure decisions in comparison to purely domestic corporations. The non-linear effect of multinational corporations’ profitability on their leverage ratio implies that higher profitability multinational firms consider tax shield advantages of debt more important, in comparison to the informational asymmetry problem, in order to benefit from a debt interest tax shield. Such findings are consistent with the theoretical view that predicts that multinational firms have higher potential tax shield advantages in comparison to purely domestic firms due to multinational firms’ operations in different countries that impose different tax systems. However, the negative effect of domestic firms’ profitability indicates that information asymmetry problems explain the causality between domestic firm’s profitability and leverage decisions.
Prior research finds that multinational firms’ capital structure includes a significantly lower leverage ratio in comparison to their domestic counterparts. However, prior research did not consider comparing the leverage level of US multinational and domestic corporations during a period of poor global macroeconomics condition. The third empirical chapter in this thesis finds that US multinational and domestic firms’ market leverage ratios increased significantly during the global financial crisis but book leverage ratios had no significant effect during the global financial crisis. Furthermore, although finance theory predicts that multinational firms should have lower expected bankruptcy cost of debt financing, the third empirical chapter finds that multinational firms’ debt decisions did not have significant difference, compared to domestic firms’ leverage decisions, during the period of the 2008-2009 global financial crisis. To the best of my knowledge, this finding is considered as one of the earliest pieces of evidence that is inconsistent with the theoretical predictions for multinational firms’ lower expected bankruptcy – in comparison to domestic corporations due to multinational firms’ diversification of their operations in different uncorrelated economies.
Some key implications have emerged from the research findings. First, multinational firms’ managers should consider the fact that the size of multinational firms is associated with higher agency cost of debt which can inversely influence multinational firms’ financing. Second, the finding of the second chapter implies that multinational and domestic corporations’ financing decisions are differently affected by corporate tax rates and corporation tax regulators should consider this more closely.