Capital structure formation in multinational and local companies in the Baltic States

This paper investigates whether there are systematic differences in the capital structure formation of local companies and subsidiaries of multinational companies (MNCs) operating in the Baltic States over the period from 2000 to 2008. The analysis is based on panel data estimation on a sample covering 87,000 company-year observations. We find local companies to be more leveraged than MNCs, mainly explained by use of intra group equity financing, lower investment intensity and higher profit retention of the latter. However, MNCs appear to have had better access to external finance, resulting in their competitive advantage over local companies, especially in periods characterised by significant credit constraints. In contrast, local companies appear to have started to increase their leverage under relaxed credit constraints during the years of economic boom, demonstrating local companies’ greater vulnerability to adverse cyclical effects.