Heterogeneous Cross-Border Financial Allocations

We construct a unique micro-level dataset covering the near universe of France's cross-border financial positions and document three novel facts about firms' financial internationalization. First, cross-border financial positions are highly concentrated, substantially more so than international trade. Second, financial internationalization differs sharply across firms: firms in the bottom 90 percentiles only raise foreign funds, whereas the largest firms both invest and raise funds abroad. Third, newly internationalized firms enter primarily by raising foreign equity. These facts reveal two distinct margins of financial internationalization: a funding margin, through which the majority of firms internationalize by only raising foreign equity, and an investment margin, reached only by the largest firms. We develop a heterogeneous-firm model in which domestic financial imperfections make foreign equity valuable, rationalizing these two margins. Empirically, financial internationalization associates with a rebalancing of capital structure away from costly domestic bank debt and an expansion in firms' equity and size. At the macro level, firm heterogeneity matters: the cross-border allocations of the majority of firms are substantially more affected by country-specific factors than aggregate estimates suggest, because these positions disproportionately reflect the allocations of the largest firms, whose cross-border activities span worldwide largely independently of country characteristics.