Working Paper: CEPR ID: DP7958
Authors: Basak Akbel; Monika Schnitzer
Abstract: We analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. We identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. We find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. Forintermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire building tendencies. Decentralized borrowing is more attractive for companies focussing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems.
Keywords: capital structure; coinsurance; creditor rights; internal capital markets; multinational corporations
JEL Codes: F23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger creditor rights (G33) | optimal borrowing structure (G32) |
| stronger creditor rights (G33) | likelihood of liquidation (G33) |
| likelihood of liquidation (G33) | managerial incentives (M52) |
| managerial incentives (M52) | attractiveness of decentralized versus centralized borrowing structures (H74) |
| managerial tendencies toward empire building (P12) | decentralized borrowing preference (H74) |
| managerial tendencies toward empire building (P12) | centralized borrowing preference (H74) |
| stronger creditor rights (G33) | local borrowing (H74) |
| stronger creditor rights (G33) | efficient insolvency systems (G33) |