An Empirical Examination of Multinational Corporate Capital Structure
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Numeroustextbook authors have suggestedthat multinationalcorporations (MNCs) should be able to supportmore debt in their capital structuresthan purelydomesticcorporations(DCs).IThey point out that an MNC operatesin severalless than perfectlycorrelatedeconomies and that this diversification shouldtranslateinto lowerearningsvolatility,and hencea lowerprobabilityof bankruptcy.Thus, given the traditionalparadigmof a trade-offbetweenthe tax shelterof debt and expectedbankruptcycosts, MNCs should have lower expected bankruptcycosts and hence higher leverage ratios. However,the empiricalevidencesuggeststhat, in fact, MNCs haveless debt in their capital structuresthan DCs [Lee 1986;Fatemi1988;Lee and Kwok 1988].Thus,either internationaldiversificationdoes not lead to a reductionin overallbusiness risk, or thereare other factorsthat need to be considered. MNCs are exposed to additional economic forces, and have additional opportunities,that are less relevantfor DCs. For example,MNCs may have greaterexposureto internationalpoliticalrisk,and they may be affecteddifferently by exchange rate fluctuations.MNCs also face varying and at times uncertaintax systems.Furthermore,there could be systematicdifferencesin the agencycosts faced by MNCs and DCs. Most of the empiricalliteratureon capital structure has either completely ignored international factors, or
*Todd Burgman is Assistant Professor of Finance in the Graduate Management Institute at Union College, Schenectady, New York. His current research focuses on the financial management of multinational corporations, and on the financial management implications of various corporate governance systems. I am gratefulfor helpful commentsfrom RichardDeFusco, John Geppert and Thomas Zorn at the Universityof Nebraska,from seminarparticipantsat the Universityof Kiel, Union College, and the FinancialManagementAssociationannualmeeting,and fromthreeanonymousreferees. Received:June 1995;Revised:February& June1996;Accepted:June1996. 553
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JOURNAL OF INTERNATIONAL BUSINESS STUDIES, THIRD QUARTER 1996
implicitly assumed that they can be adequately proxied by the standard business risk measures. However, if specific international factors are relevant in determining MNC capital structures, then models that ignore these factors are misspecified. This paper examines whether there are systematic differences in the traditional capital structure determinants between MNCs and DCs, and if there are additional, uniquely international factors that may help explain the capital structure choice of multinational corporations. The results suggest that specific international factors such as political risk and exchange rate risk are relevant to the multinational capital structure decision, that multinationals have higher agency costs than purely domestic firms, and that international diversification does not lower earnings volatility for multinatio
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