International Corporate Diversification and Financial Flexibility
57 Pages Posted: 1 Aug 2016
Date Written: May 2016
If the location of a firm’s operations is relevant for financing, multinationals should have easier access to different foreign sources of funding relative to purely domestic firms because their operations are located in multiple countries. Consistent with this hypothesis, I find that U.S. multinationals are more likely to borrow from a foreign bank, particularly from a lender in a country where they have foreign subsidiaries, and to place a corporate bond in international markets than domestic firms. One implication of multinationals’ greater funding flexibility is that they are less affected by capital market dislocations in their home country than domestic firms. Using the 2007-2009 financial crisis as a capital supply shock, I find that U.S. multinationals relied more on foreign funding sources in bank loans after the failure of Lehman Brothers in contrast to domestic firms. Consequently, multinationals reduced their U.S. investment less than domestic firms during the crisis.
Keywords: Financial flexibility, Multinational firms, Financial Crisis, Access to Capital
JEL Classification: G31, G32, F30
Suggested Citation: Suggested Citation