Going Abroad in a Risky World: Geographic Diversification, Institutional Frictions, and Corporate Leverage

58 Pages Posted: 2 Jun 2016 Last revised: 7 Dec 2018

See all articles by Jongsub Lee

Jongsub Lee

University of Florida - Warrington College of Business Administration

Leming Lin

University of Pittsburgh - Katz Graduate School of Business

Andy Naranjo

University of Florida - Warrington College of Business Administration

Date Written: October 19, 2018

Abstract

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

Lee, Jongsub and Lin, Leming and Naranjo, Andy, Going Abroad in a Risky World: Geographic Diversification, Institutional Frictions, and Corporate Leverage (October 19, 2018). Available at SSRN: https://ssrn.com/abstract=2787514 or http://dx.doi.org/10.2139/ssrn.2787514

Jongsub Lee (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Leming Lin

University of Pittsburgh - Katz Graduate School of Business ( email )

346 Mervis Hall
University of Pittsburgh
Pittsburgh, PA 15260
United States

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

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