Going Abroad in a Risky World: Geographic Diversification, Institutional Frictions, and Corporate Leverage
58 Pages Posted: 2 Jun 2016 Last revised: 7 Dec 2018
Date Written: October 19, 2018
Using novel data on detailed country-level sales exposures of U.S. multinational companies (MNCs) and unique identification strategies, we show that international cash flow diversification enhances firm debt capacity, but the magnitude of this effect varies with the innate country institutional frictions to which the firm is exposed. We find that a one standard deviation increase in MNC across-country cash flow diversification results in a 5 percent increase in firm leverage from its sample average. However, across-country institutional quality and tax frictions reduce the MNC geographic diversification benefit by 27 to 55 percent from the debt capacity enhancement without such frictions.
Keywords: Multinational firms, MNCs, Corporate leverage, Geographic diversification, Cash flow volatility, Country risk, Tax, Regulatory frictions, Political risk
JEL Classification: G32, G35
Suggested Citation: Suggested Citation