Domestic and Multinational Capital Structure

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DOMESTIC AND MULTINATIONAL CAPITAL STRUCTURE: THEORY AND EVIDENCE J. Edward Graham, Jr. ABSTRACT The capital structure of the firm is examined in the domestic environment under successively less restrictive assumptions. Allowances are then made for agency costs and information asymmetries. The domestic capital structure theory is extended to the multinational environment and examined empirically. Results broadly support financial theory. Where the theory is restrictive in its assumptions, it describes multinational capital structure poorly. Subsequent research is proposed. DOMESTIC AND MULTINATIONAL CAPITAL STRUCTURE: THEORY AND EVIDENCE Working Paper Introduction What is capital structure and how is capital structure chosen by a corporation? What are the roles of debt and equity in this capital structure? How are these components chosen in a “perfect market” without taxes or bankruptcy costs? How do these roles and proportions change as an allowance is made for taxes and bankruptcy costs? What roles are played by debtholder and equityholder incentives in this structure? What is the impact of agency costs and asymmetric information on the capital structure? How, if at all are these factors and their impact on a firm’s capital structure changed when a provision is made for international variables? Is the capital structure of the multination corporation (MNC) significantly different from the domestic corporations (DC)? These questions are addressed. In Section 1, capital structure is defined and considered under the restrictive assumptions of a “perfect market.” The implications of a frictionless capital market are examined. An allowance is made for corporate and personal taxes in Section 2. The following section includes a provision for the impact of uncertainty, leverage and

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