Multinational Capital Structure and Financial Flexibility

Abstract

We address multinational capital structure decisions when firms have varying degrees of financial flexibility for shifting income and/or tax shields between subsidiaries. We find: a) Firms can use leverage to dramatically reduce negative valuation effects from operating in a high-tax country. b) Financial flexibility is a key determinant of optimal capital structure, acting as both a substitute and a complement for leverage. c) Multinational firms derive a synergistic effect from financial flexibility which can enhance their value beyond that for a single-country firm from a low-tax jurisdiction. d) Optimal Capital structure typically differs substantially across subsidiaries, with each having positions in multiple currencies.

JEL Classification: F31, F34, G32, H25