CAPITAL STRUCTURE
Both theory and empirical evidence indicate that the capital structures of multinational
companies differ from those of purely domestic firms. Furthermore, differences
are observed among the capital structures of MNCs domiciled in various
countries. Several factors tend to influence the capital structures of MNCs.
International Capital Markets
MNCs, unlike smaller, domestic firms, have access to the Euromarket (discussed
earlier) and the variety of financial instruments available there. Because of their
access to the international bond and equity markets, MNCs may have lower
long-term financing costs, which result in differences between the capital structures
of MNCs and those of purely domestic companies. Similarly, MNCs based
in different countries and regions may have access to different currencies and
markets, resulting in variances in capital structures for these multinationals.
International Diversification
It is well established that MNCs, in contrast to domestic firms, can achieve further
risk reduction in their cash flows by diversifying internationally. International
diversification may lead to varying degrees of debt versus equity. Empirically, the
evidence on debt ratios is mixed. Some studies have found MNCs’ debt proportions
to be higher than those of domestic firms. Other studies have concluded the
opposite, citing imperfections in certain foreign markets, political risk factors,
and complexities in the international financial environment that cause higher
agency costs of debt for MNCs.