Working Paper: NBER ID: w26762
Authors: Isil Erel; Yeejin Jang; Michael S. Weisbach
Abstract: An increasing fraction of firms worldwide operate in multiple countries. We study the costs and benefits of being multinational in firms’ corporate financial decisions and survey the related academic evidence. We document that, among U.S. publicly traded firms, the prevalence of multinationals is approximately the same as domestic firms, using classification schemes relying on both income-based and a sales-based metrics. Outside the U.S., the fraction is lower but has been growing. Multinational firms are exposed to additional risks beyond those facing domestic firms coming from political factors and exchange rates. However, they are likely to benefit from diversification of cash flows and flexibility in capital sources. We show that multinational firms, indeed, have a better access to foreign capital markets and a lower cost of debt than otherwise identical domestic firms, but the evidence on the cost of equity is mixed.
Keywords: multinational firms; corporate finance; capital markets; cost of debt; cost of equity
JEL Codes: G30; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multinational firms (F23) | lower cost of debt (G32) |
| better access to foreign capital markets (F30) | lower cost of debt (G32) |
| diversification of cash flows across countries (F29) | lower cost of debt (G32) |
| multinational firms (F23) | different risk profiles than domestic firms (F23) |
| different risk profiles than domestic firms (F23) | mixed evidence regarding cost of equity (G12) |
| political and exchange rate risks (F31) | complicating overall assessment of cost of capital (G32) |