Financial shock and the United States multinational and domestic corporations leverage

Abstract

Puzzling findings from prior studies demonstrated that US multinational corporations (MNCs) capital structure include significantly lower leverage than their domestic counterparts. This study utilized the period of the 2008- Global Financial Crisis (GFC) to compare the leverage ratios between MNCs and Domestic Corporations (DCs) to provide a new approach to testing whether the lower expected bankruptcy cost of MNCS enables them to use more leverage than their domestic counterparts. The data used includes Compustat non-financial firms over the years 2002–2019 and the empirical method applied is the panel data fixed effects regression. Consistent with prior studies, the results show that MNCs capital structure includes lower leverage levels in comparison to their domestic counterparts before and post the GFC period. However, in the 2008 financial shock event, this study explores that MNCs have significantly higher market and book leverage than purely domestic firms. This higher leverage of MNCs is attributed to their lower expected bankruptcy arising from their international diversification of operations and their advantage in accessing external financial markets. Prior research justified MNCs’ lower leverage ratios to higher agency costs. Nevertheless, the current study confirms that the trade-off theory’s bankruptcy cost is still empirically relevant. The findings are robust after employing alternative robustness checks. At best, this is the first study that compares the capital structure of MNCs and DCs during times of financial shock and credit constraint.