This paper analyzes the capital structures of foreign affiliates and internal capital markets of multinational corporations. Ten percent higher local tax rates are associated with 2.8% higher debt/asset ratios, with internal borrowing being particularly sensitive to taxes. Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditor rights, reflecting significantly higher local borrowing costs. Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three-quarters of reduced external borrowing induced by capital market conditions. Multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets.
Publication Information & Recommended Citation
Desai, Mihir A., C. Fritz Foley, and James R. Hines, Jr. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets." In vol. 2 of A Reader in International Corporate Finance, edited by Stijn Claessens and Luc Laeven, 243-279. Washington, D.C.: The World Bank, 2006. (Originally published under the same title in J. Fin. 59, no. 6 (2004): 2451-87.)