Multinational Cost of Capital
Multinational Cost of Capital
Capital Structure, Risk and the Cost of Capital for Multinational Companies
(1713 words)
2015
Table of Contents
Introduction 2
Literature Review 2
Capital Structure, Risk and the Cost of Capital for Multinational Companies 2
Criticism to the work and the upstream-downstream hypothesis 2
Conclusion 2
References 2
Introduction
“Theoretically, MNEs should be in a better position than their domestic counterparts to support higher debt ratios because their cash flows are diversified internationally.” (Eiteman, et al., 2013, p.386). However, recent empirical studies have come to a different conclusion.
The following will be presented evidences found in the literature review that show that it is not always that companies reduce their risks and consequently the cost of capital when internationalize. Domestic firms can indeed have lower risk than multinationals. Factors as the host country and the companies’ internationalization degree should be also analysed.
Literature Review
Capital Structure, Risk and the Cost of Capital for Multinational Companies
Studies on multinational capital structure have pointed in opposite directions, sometimes showing that multinationals are more indebted than domestic companies and occasionally that domestics are more indebted than multinationals. The first researches were conducted with United States companies and showed that multinationals from this country have lower debt ratios than their local counterparts. Another group of more recent studies in multinational companies based in countries such as France, Canada and Brazil has pointed out that multinational from these countries have higher debt ratios than their domestic peers.
Although of paradox results, a plausible explanation may be found in the Reeb and Kwok (2000) work. The authors formulated the hypothesis called upstream-downstream which postulates that when a multinational is headquartered in a more stable economy and expands
Capital Structure, Risk and the Cost of Capital for Multinational Companies
(1713 words)
2015
Table of Contents
Introduction 2
Literature Review 2
Capital Structure, Risk and the Cost of Capital for Multinational Companies 2
Criticism to the work and the upstream-downstream hypothesis 2
Conclusion 2
References 2
Introduction
“Theoretically, MNEs should be in a better position than their domestic counterparts to support higher debt ratios because their cash flows are diversified internationally.” (Eiteman, et al., 2013, p.386). However, recent empirical studies have come to a different conclusion.
The following will be presented evidences found in the literature review that show that it is not always that companies reduce their risks and consequently the cost of capital when internationalize. Domestic firms can indeed have lower risk than multinationals. Factors as the host country and the companies’ internationalization degree should be also analysed.
Literature Review
Capital Structure, Risk and the Cost of Capital for Multinational Companies
Studies on multinational capital structure have pointed in opposite directions, sometimes showing that multinationals are more indebted than domestic companies and occasionally that domestics are more indebted than multinationals. The first researches were conducted with United States companies and showed that multinationals from this country have lower debt ratios than their local counterparts. Another group of more recent studies in multinational companies based in countries such as France, Canada and Brazil has pointed out that multinational from these countries have higher debt ratios than their domestic peers.
Although of paradox results, a plausible explanation may be found in the Reeb and Kwok (2000) work. The authors formulated the hypothesis called upstream-downstream which postulates that when a multinational is headquartered in a more stable economy and expands
References: Burgman, T. A., 1996. An Empirical Examination of Multinational Corporate Capital Structure. Journal of International Business Studies, 27(3), pp. 553-570. Chen, C. J. P., Cheng, C. S. A., He, J. & Kim, J., 1997. An investigation of the relationship between international activities. Journal of International Business Studies, 28(3), pp. 563-577. Eiteman, D. K., Stonehill, A. I. & Moffett, M. H., 2013. Multinational Business Finance. 13th ed. Harlow: Pearson. Kwok, C. C. Y. & Reeb, D. M., 2000. Internationalization and firm risk: An upstream-downstream hypothesis. Journal of International Business Studies, 31(4), pp. 611-629. Lee, K. C. & Kwok, C. C. Y., 1988. Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure. Journal of International Business Studies, 19(2), pp. 195-217. Mittoo, U. R. & Zhang, Z., 2008. The capital structure of multinational corporations: Canadian versus US evidence. Journal of Corporate Finance, 14(5), pp. 706-720. Saito, R. & Hiramoto, E., 2010. Foreign activity effects and capital structure: Brazilian evidence. Academia Revista Latinoamericana de Administración, 45(1), pp. 59-75. Shapiro, A. C., 1978. Financial structure and cost of capital in the multinational corporation. Journal of Financial and Quantitative Analysis, 13(2), pp. 211-226. Singh, M. & Nejadmalayeri, A., 2004. Internationalization, capital structure, and costof capital: Evidence from French corporations. Journal of Multinational Financial, 14(2), pp. 153-169.