Characteristics of Subsidiary Financing Choices: The Role of Institutional Distance from Home Country

41 Pages Posted: 18 Mar 2020 Last revised: 17 Sep 2021

See all articles by Yan Du

Yan Du

EDHEC Business School

John W. Goodell

University of Akron - Department of Finance, College of Business Administration

Vanja Piljak

University of Vaasa - Department of Accounting and Finance

Milos Vulanovic

EDHEC Business School

Date Written: February 21, 2020

Abstract

We examine how the institutional distance between home and host countries affects the characteristics of foreign subsidiary debt, including leverage and debt maturity choices, as well as cash holdings. We utilize the multidimensionality of institutional distances to examine ten different distance dimensions. We use a sample of 3,139 foreign subsidiaries operating in France and being headquartered in 44 different countries. We find that while subsidiaries’ financing choices are partially explained by standard determinants, they are also significantly impacted by different forms of institutional distance. Regarding the heterogeneity of institutional distances, results show the dominance of financial and cultural distances for leverage levels; knowledge and political distances for debt maturities; and a dominance of demographic, geographic, and political distances for cash holdings levels. Especially interesting, we find that leverage levels of subsidiaries are more, not less, levered when the parent has greater cultural distance from France. We interpret this result as consistent with parents, out of agency concerns, being less forthcoming with equity to more culturally distance subsidiaries. Culturally distant subsidiaries must contend with enhanced agency concerns of parent MNCs as well as liability of foreignness with local debt markets.

Keywords: Capital structure, Debt maturity, Institutional distance, Liability of foreignness, Subsidiaries financing

JEL Classification: G15, G30, G32

Suggested Citation

Du, Yan and Goodell, John W. and Piljak, Vanja and Vulanovic, Milos, Characteristics of Subsidiary Financing Choices: The Role of Institutional Distance from Home Country (February 21, 2020). Available at SSRN: https://ssrn.com/abstract=3530824 or http://dx.doi.org/10.2139/ssrn.3530824

Yan Du

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

John W. Goodell

University of Akron - Department of Finance, College of Business Administration ( email )

259 S. Broadway
Akron, OH 44325
United States

Vanja Piljak

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

Milos Vulanovic (Contact Author)

EDHEC Business School ( email )

24, avenue Gustave Delory
CS 50411
Roubaix, 59057
France

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