IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v19y2010i2p140-150.html
   My bibliography  Save this article

Capital structure, dividend policy, and multinationality: Theory versus empirical evidence

Author

Listed:
  • Aggarwal, Raj
  • Kyaw, NyoNyo Aung

Abstract

Textbook theory posits that multinational firms are large and diversified and should have higher debt capacity. In contrast, debt capacity of such firms can be expected to be lower because of the additional risks of foreign operations. This puzzle is unresolved by the empirical literature. Also, prior studies of multinational firms have not examined the relationship between debt and dividend payout ratios that can be expected in theory (both help manage agency costs). Accounting for this interdependence and controlling for appropriate other variables, this study documents that compared to domestic companies, multinational companies have significantly lower debt ratios with such debt ratios decreasing with increasing multinationality.

Suggested Citation

  • Aggarwal, Raj & Kyaw, NyoNyo Aung, 2010. "Capital structure, dividend policy, and multinationality: Theory versus empirical evidence," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 140-150, March.
    • Handle: RePEc:eee:finana:v:19:y:2010:i:2:p:140-150
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057-5219(10)00011-6
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michael S. Long & Ileen B. Malitz, 1985. "Investment Patterns and Financial Leverage," NBER Chapters, in: Corporate Capital Structures in the United States, pages 325-352, National Bureau of Economic Research, Inc.
    2. M. Ameziane Lasfer, 1995. "Agency costs, taxes and debt: The UK evidence," European Financial Management, European Financial Management Association, vol. 1(3), pages 265-285, November.
    3. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    5. Cloyd, C. Bryan & Limberg, Stephen T. & Robinson, John R., 1997. "The Impact of Federal Taxes on the Use of Debt by Closely Held Corporations," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(2), pages 261-277, June.
    6. Chang, Chun, 1992. "Capital Structure as an Optimal Contract between Employees and Investors," Journal of Finance, American Finance Association, vol. 47(3), pages 1141-1158, July.
    7. Kim, Wi Saeng & Sorensen, Eric H., 1986. "Evidence on the Impact of the Agency Costs of Debt on Corporate Debt Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(2), pages 131-144, June.
    8. Abimbola Adedeji, 1998. "Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9-10), pages 1127-1155.
    9. Doukas, John A. & Pantzalis, Christos, 2003. "Geographic diversification and agency costs of debt of multinational firms," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 59-92, January.
    10. Benjamin M. Friedman, 1985. "Corporate Capital Structures in the United States," NBER Books, National Bureau of Economic Research, Inc, number frie85-1, March.
    11. Todd A Burgman, 1996. "An Empirical Examination of Multinational Corporate Capital Structure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(3), pages 553-570, September.
    12. Charles J P Chen & C S Agnes Cheng & Jia He & Jawon kim, 1997. "An Investigation of the Relationship between International Activities and Capital Structure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 28(3), pages 563-577, September.
    13. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    14. Friend, Irwin & Lang, Larry H P, 1988. " An Empirical Test of the Impact of Managerial Self-interest on Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 43(2), pages 271-281, June.
    15. Chuck C Y Kwok & David M Reeb, 2000. "Internationalization and Firm Risk: An Upstream-Downstream Hypothesis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 31(4), pages 611-629, December.
    16. Kwang Chul Lee & Chuck C Y Kwok, 1988. "Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 19(2), pages 195-217, June.
    17. Fatemi, Ali M., 1988. "The effect of international diversification on corporate financing policy," Journal of Business Research, Elsevier, vol. 16(1), pages 17-30, January.
    18. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    19. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
    20. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    21. Errunza, Vihang R & Senbet, Lemma W, 1981. "The Effects of International Operations on the Market Value of the Firm: Theory and Evidence," Journal of Finance, American Finance Association, vol. 36(2), pages 401-417, May.
    22. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    23. Wi Saeng Kim & Esmeralda O Lyn, 1986. "Excess Market Value, the Multinational Corporation, and Tobin's q-Ratio," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 17(1), pages 119-125, March.
    24. Joan Farre-Mensa & Roni Michaely & Martin Schmalz, 2014. "Payout Policy," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 75-134, December.
    25. Noronha, Gregory M. & Shome, Dilip K. & Morgan, George E., 1996. "The monitoring rationale for dividends and the interaction of capital structure and dividend decisions," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 439-454, April.
    26. Chenchuramaiah T. Bathala & Kenneth P. Moon & Ramesh P. Rao, 1994. "Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective," Financial Management, Financial Management Association, vol. 23(3), Fall.
    27. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    28. Michael S. Rozeff, 1982. "Growth, Beta And Agency Costs As Determinants Of Dividend Payout Ratios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 5(3), pages 249-259, September.
    29. Cloyd, C. Bryan & Limberg, Stephen T. & Robinson, John R., 1997. "The Impact of Federal Taxes on the Use of Debt by Closely Held Corporations," National Tax Journal, National Tax Association, vol. 50(2), pages 261-77, June.
    30. Allen Michel & Israel Shaked, 1986. "Multinational Corporations vs Domestic Corporations: Financial Performance and Characteristics," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 17(3), pages 89-100, September.
    31. Abimbola Adedeji, 1998. "Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9‐10), pages 1127-1155, November.
    32. Jensen, Gerald R. & Solberg, Donald P. & Zorn, Thomas S., 1992. "Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(2), pages 247-263, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joliet, Robert & Muller, Aline, 2013. "Capital structure effects of international expansion," Journal of Multinational Financial Management, Elsevier, vol. 23(5), pages 375-393.
    2. Crutchley, Claire E. & Jensen, Marlin R. H. & JaheraJr., John S. & Raymond, Jennie E., 1999. "Agency problems and the simultaneity of financial decision making: The role of institutional ownership," International Review of Financial Analysis, Elsevier, vol. 8(2), pages 177-197, June.
    3. Chiung-Jung Chen & Chwo-Ming Joseph Yu, 2011. "FDI, Export, and Capital Structure," Management International Review, Springer, vol. 51(3), pages 295-320, June.
    4. Shumi Akhtar, 2018. "Dividend payout determinants for Australian Multinational and Domestic Corporations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 11-55, March.
    5. Shumi Akhtar, 2017. "Capital structure of multinational and domestic corporations – a cross-country comparison," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 319-349, June.
    6. Florackis, Chris & Kanas, Angelos & Kostakis, Alexandros, 2015. "Dividend policy, managerial ownership and debt financing: A non-parametric perspective," European Journal of Operational Research, Elsevier, vol. 241(3), pages 783-795.
    7. Aggarwal, Raj & Kyaw, NyoNyo A., 2008. "Internal capital networks as a source of MNC competitive advantage: Evidence from foreign subsidiary capital structure decisions," Research in International Business and Finance, Elsevier, vol. 22(3), pages 409-439, September.
    8. Florence André-Le Pogamp & Frédéric Perdreau, 2009. "Stratégies de diversification et structure du capital," Revue Finance Contrôle Stratégie, revues.org, vol. 12(4), pages 5-38, December.
    9. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    10. repec:dgr:rugsom:01e54 is not listed on IDEAS
    11. Chaido Dritsak, 2015. "Box Jenkins Modeling of Greek Stock Prices Data," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 740-747.
    12. Chen, Linda H. & Jiang, George J., 2001. "The financing behavior of Dutch firms," Research Report 01E54, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    13. Doukas, John A. & Pantzalis, Christos, 2003. "Geographic diversification and agency costs of debt of multinational firms," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 59-92, January.
    14. Singh, Manohar & Davidson, Wallace III & Suchard, Jo-Ann, 2003. "Corporate diversification strategies and capital structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 147-167.
    15. Chkir, Imed Eddine & Cosset, Jean-Claude, 2001. "Diversification strategy and capital structure of multinational corporations," Journal of Multinational Financial Management, Elsevier, vol. 11(1), pages 17-37, February.
    16. Songul KAKILLI ACARAVCI, 2015. "The Determinants of Capital Structure: Evidence from the Turkish Manufacturing Sector," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 158-171.
    17. Im, Hyun Joong & Kang, Ya & Shon, Janghoon, 2020. "How does uncertainty influence target capital structure?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Jouida, Sameh & Hellara, Slaheddine, 2018. "Diversification and target leverage of financial institutions," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 11-35.
    19. Lindner, Thomas & Klein, Florian & Schmidt, Stefan, 2018. "The effect of internationalization on firm capital structure: A meta-analysis and exploration of institutional contingencies," International Business Review, Elsevier, vol. 27(6), pages 1238-1249.
    20. Pacheco, Luís, 2016. "Capital structure and internationalization: The case of Portuguese industrial SMEs," Research in International Business and Finance, Elsevier, vol. 38(C), pages 531-545.
    21. Mário Santos & António Moreira & Elisabete Vieira, 2014. "Ownership concentration, contestability, family firms, and capital structure," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 1063-1107, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:19:y:2010:i:2:p:140-150. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.