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Multinational Affiliates and Local Financial Markets

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Author Info
Selin Sayek
Hyoung Goo Kang
Alexander Lehmann

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Abstract

We use data on the sources of debt finance of U.S. majority-owned foreign affiliates in 53 countries over the period 1983 to 2001 to examine the role of financial market development, and exposure to host country-specific risk on the financing choices of these affiliates. We find that total balance sheets are about four times as large as the cross-border component of foreign direct investment (FDI). The extent of financial leverage through local debt is positively related to host-country corporate tax rates, exchange rate variability, local currency-denominated sales, and financial development. Factors that further the role of local debt reduce that of parent company debt, and through this substitution overall leverage increases.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/107.

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Length: 25 pages
Date of creation: 13 Jul 2004
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Handle: RePEc:imf:imfwpa:04/107

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Keywords: Foreign investment ; United States ; Debt refinancing ; Domestic debt ; Capital markets ; International financial system ; Data analysis ; Tax rates ; Exchange rate variability ;

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  7. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2003. "World market integration through the lens of foreign direct investors," Policy Research Working Paper Series 3060, The World Bank. [Downloadable!]
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  9. Joshua Aizenman, 1992. "Exchange Rate Flexibility, Volatility and the Patterns of Domestic and Foreign Direct Investment," IMF Working Papers 92/20, International Monetary Fund.
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  10. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November. [Downloadable!] (restricted)
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  11. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
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