Financial flexibility and capital structure decision citeseerx. Financial flexibility and capital structure chris harris, elon university abstract this study examines the relation between financial flexibility through share repurchases and capital structure. It is our expectation that the impact of internationalization on agency costs and capital structure choice depends on the set of foreign countries in which a multinational firm has subsidiaries. Capital structure capital structure preferred stock. The impact of capital structure on financial performance. Significant risk exposures increase probabilities of future financial distress and can discouraging the use of debt. It begins by extending the weighted costofcapital concept to the multinational firm. Capital structure decision the overall capital structure of an mnc is essentially a combination of the capital structures of the parent body and its subsidiaries. Capital structure and costofcapital for the multinational firm. Welch 2008 argues that the financial debttoasset ratio is flawed as a dependent variable in capital structure research, because the converse of financial debt is not equity.
An empirical examination of multinational corporate. How investment opportunities affect optimal capital structure. The authors develop a new modelling framework that simulates financial variables of a set of firms in a given sector, and uses the framework to analyze how such firms compete for new investments. Hence, the capital structure theories or indicators used to explain leverage or. Analyzing a companys capital structure investopedia. A fixedeffects panel data regression model with time effects is used in the estimation. Under the capital structure, decision the proportion of longterm sources of capital is determined. The financial needs of a business can be categorised as follows. Effects of leverage on the shareholders return or earnings per share have already. The capital structure of multinational corporations request pdf. Introduction over the years following the bankruptcy reform act of 1978, a great deal of the literature has examined.
Analysis of capital structure stability of listed firms in. The financial flexibility framework provides explanations for several capital structure puzzles raised in the literature, suggesting that financial flexibility can be an important missing link. The financial capital of multinational companies springerlink. This association stems from the view that bankruptcy or other forms of financial distress in an overseas subsidiary can seriously impair the parent companys. The nancial exibility hypothesis suggest nonlinear inverted vshape relationship between leverage ratio and. Divisional cost of capital is considered as the expected rate of return for a corporations division whose risks differ greatly from those of other departments within the corporation. Multinational capital structure and financial flexibility. Financial flexibility, firm size and capital structure abstract we examine nancial exibility as an alternative explanation to existing capital structure theories.
By providing advice on capital structure and financial flexibility, treasurers can add significant value as a business partner to senior management. These forces arise from key components of the neoliberal regime such as financial liberalization, privatization, increased labor market flexibility, trade and investment liberalization, and austerity macro policy. This paper examines whether there are systematic differences in the traditional capital structure determinants between mncs and dcs, and if there are additional, uniquely international factors that may help explain the capital structure choice of multinational. Capital structure choice across countries empirical studies of the capital structure in an international setting, for example remmers, stonehill, wright, and beekhuisen 1974, and toy, stonehill, remmers, wright and beekhuisen 1974, find the home country of a corporation is a significant determinant of capital structure. Lecture notes on financial markets pdf 82p this note covers the following topics. Financial structure and cost of capital in the multinational corporation volume issue 2 alan c.
Oct 09, 20 multinational cost and capital structure 1. Divisional cost of capital is regarded as the most important capital costs that an entity incurs in the management of its businesses brigham and joel, 2007. Akintoye 2009 confirmed the role of business risk, taxes, managerial behavior or financial flexibility in the analysis of firm performance. Request pdf financial flexibility and capital structure decision we. The purpose of this paper is to analyze the corporate capital structure stability of listed firms in china during the period 199020. A survey of european firms how firms make their capital structure decisions has been one of the most extensively researched areas in corporate finance. Thrust of mncs is on worldwide capital structure because suppliers of capital to a multinational firm are assumed to associate the risk of default with the mncs worldwide debt ratio. The effects of financial flexibility demand on corporate financial. The factors influencing the capital structure or determinants of capital structure are discussed as follows financial leverage or trading on equity. A17 2 chapter objectives to explain how corporate and country characteristics influence an mncs cost of capital.
Vary judiciously to capitalize on opportunities to lower taxes, reduce financing costs and. Multinational network, flexibility option, bankruptcy resolution, chapter 11. What are the challenges in managing multinational firms. A multinational perspective on capital structure choice and internal capital markets mihir a. The nancial exibility hypothesis suggest nonlinear inverted vshape relationship between leverage ratio and rm size. Multinational firms operating around the world face a wide variety of. A multinational perspective on capital structure choice. The business risks associated with investment carry implications for firm financial decisions.
The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Shapiro skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. The impact of financial flexibility on capital structure decisions. The relevant question that ought to govern research into the multinational international corporation could be enunciated in these terms. Capital structure refers to the level of firm financing derived from either debt or equity. In order to start business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures. This paper seeks to provide a comprehensive approach to analyze the costofcapital question. The central objective of this paper is to empirically examine the relationship between the capital structure of portuguese small and medium enterprises smes and their export performance. To be sure, at this point both capital mobility and the neoliberal model or washington consensus. In an international setting, the tax costs of debt and equity finance depend on the. An integrated model of multinational flexibility and. A multinational perspective on capital structure choice and. Financial flexibility has been shown to be the top consideration among cfos when determining firm debt levels graham and harvey 2001.
Pdf financial flexibility and the speed of target adjustment of. This is known as fixed capital requirements of the enterprise. Financial flexibility and capital structure decision request pdf. The corporate finance of multinational firms brookings institution. Corporate finance, international trade and investment, public economics. May 06, 2009 in stories about the auto companies and the banks, weve been hearing a lot about debttoequity swaps, and exchanging preferred shares for common stock. Financial flexibility, leverage, and firm size1 semantic scholar. International corporate diversification and financial flexibility. Corporate multinational flexibility option and bankruptcy. Financial flexibility and capital structure decision by.
I empirically test the impact of financial flexibility on capital structure. Determinants of capital structure mba knowledge base. Financial structure and cost of capital in the multinational. That happens to be the need of the company because eps happens to be the maximum on it. Capital structure, payout policy, and financial flexibility. We show that multinational firms, indeed, have a better access to foreign capital markets and a lower cost of debt than otherwise. A number of issues which bear upon the financing decisions of the multinational corporation are addressed, and related to underlying theoretical and empirical questions with regard to the degree of segmentation or integration of international money and capital markets. Pdf the latest biggest financial crisis reveals different weakness points over the global financial.
There are three different approaches to determining the subsidiarys financial structure. International capital structure international 16 and the. Does international corporate diversification improve. Capital structure no matter how modest or excessive the firms use of debt financing, both its cost of debt capital, rd, and cost of equity capital, re, remain constant the weighted average cost of capital, ra, and the firms share price, po, are affected by the firms use of financial leverage since the cost of debt is lower than the cost of. This article addresses the question of how competition for investments among companies in a certain industry affects their capital structure. The relationship between risk exposures and firm financial decisions is an element of many theories of capital structure, but these theories have received mixed empirical support. The use of long term fixed interest bearing debt and preference share capital along with equity share capital is called financial leverage or trading on equity. Lindstrom and heshmati interaction of real and financial flexibility 2 1. While equity capital cannot be refunded at any point which provides rigidity to plans.
Debt comes in the form of bond issues or longterm notes. Uk and us multinational corporations capital structure. A framework of analysis is proposed in this paper that examines the influence of environmental factors on the firmrelated capital structure determinants e. Lecture notes on financial markets pdf 82p download book. The capital structure decision involves the choice of debt versus equity financing, and is influenced by both corporate and country characteristics. Ch 20 designing capital structure capital structure. Conform to the local norm of the country where the subsidiary operates. Some of the chief factors affecting the choice of the capital structure are the. Capital structure describes the amount of debt a company uses as opposed to equity, and it is often measured with the ratio of debt to equity. He suggests that financial debt divided by financial capital the sum of financial debt plus financial equity is a correct measure. A multinational perspective on capital structure choice and internal capital markets abstract this paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of american multinational corporations. We analyze a multinational firm with flexibility in sourcing its production and with the ability to use financial markets to hedge exchange rate risk. He explained that since the capital structure is based on the tradeoff between risk and expected return, these are crucial factors in determining a target capital mix. We examine how the demand for financial flexibility affects firms capital structure decisions.
In addition, considering the international integration of the capital markets, as well. One of these outlooks is the pecking order approach to capital structure construction. Capital structure, payout policy, and financial flexibility 1. Financial flexibility, firm size and capital structure.
Most favourable proportion determines the optimum capital structure. Ch 20 designing capital structure free download as powerpoint presentation. To explain why there are differences in the costs of capital across countries. Financial flexibility and capital structure decision. Regardless of its form, excessive leverage may an insureraffects liquidity, cash flow, and operating profile and could lead to financial instability, particularly during times of systemic stress in the capital markets. Since the seminal work of modigliani and miller 1958 on the. Introduction financial flexibility is the single most important determinant of capital structure according to cfos see, e. Using the 20072009 financial crisis as a capital supply shock, i find that u. The following case provides an example of how the financing sources of multinationals can differ. Flexibility of financial planin an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans.
Financial flexibility and the speed of target adjustment of capital structure. What costofcapital figure should be used in appraising the profitability of foreign investments. This paper first presents a model of the optimal overall capital structure of the multinational firm reflecting tax and nontax factors. The capital structure decision involves the choice of debt versus equity financing, and is influenced. Debentures and loans can be refunded back as the time requires. As a consequence of shariacompliant firms higher expected bankruptcy costs, their capital structure includes lower leverage. Does international corporate diversification improve access. A multinational firm faces the challenge of dealing with different sets of government regulations that may cause it to incur additional costs. International corporate diversification and financial.
Capital structure denotes means a firm funds its operations using some blend of equity plus debt. In this paper we construct an integrated model of real flexibility and financial hedging. The relationship between risk exposures and firm financial decisions is an element of many theories of capital structure, but. The capital structure of multinational corporations. Capital structure describes the mix of a firms longterm capital, which consists of a combination of debt and equity. Hedging is used to reduce the agency costs generated by debt in the firms capital structure.
International capital structure international 16 and the cost. Multinational corporations, capital mobility and the global. Another way to look at it iue septeer pecking order theory of capital structure. Optimal capital structure for a multinational enterprise. Another way to look at it constructing the capital structure of business organization depends on quite very many perspectives and theories.
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