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Asset Tangibility and Capital Allocation within Multinational Corporations

  • Diemo Dietrich

We investigate capital allocation across a firm's divisions that differ with respect to the degree of asset tangibility. We adopt an incomplete contracting approach where the outcome of potential debt renegotiations depends on the liquidation value of assets. However, with diversity in terms of asset tangibility, liquidation proceeds depend on how funds have been allocated across divisions. As diversity can be traced back to institutional differences between countries, we provide a rationale for multidivisional decision- making in an international context. A main finding is that multinationals may be bound to go to certain countries when financiers cannot control the capital allocation.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 4.

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Date of creation: Apr 2006
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Handle: RePEc:iwh:dispap:4-06
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