Creditor Rights and Multinational Capital Structure

Abstract:     
This paper models the capital structure of a multinational firm. The analysis shows that differences between legal systems in the enforcement of creditor rights, (recently documented by empirical research) can explain the complex mix of parent and subsidiary financing observed in most multinational firms, even in the absence of both tax differentials and private information. Optimal capital structures minimize the default premia associated with the multinational's overall financing package by equating the marginal enforcability of debt contracts in the host and home countries. The implications of this model are consistent with the extant empirical research and suggest a number of new testable implications for the financing of multinational firms.

JEL Classifications: K1, F3, G3

Working Paper Series