Multinational Firms Have Found That They Can Lower Borrowing Costs

Inquiry in International Business organization and Finance. 2022 Dec; 54: 101288.

Internationalization and the capital structure of firms in emerging markets: Testify from Latin America before and after the financial crisis

Mauricio Melgarejo Duran

^aSection of Accounting, Lacy Schoolhouse of Business, Butler Academy, Indianapolis, IN 46208, United states

Sheryl-Ann Stephen

^bDepartment of Finance, Lacy School of Business, Butler Academy, Indianapolis, IN 46208, United States

Received 2022 Apr 10; Revised 2022 Jun 24; Accepted 2022 Jun 25.

Graphical abstract

Keywords: Internationalization, Multinationals, Capital structure, Debt, Security issuance

Abstruse

This study examines the impact of internationalization on the upper-case letter structure of firms in emerging markets before and later on the financial crunch of 2008, with evidence from five countries in Latin America (Argentine republic, Brazil, Chile, Mexico, and Peru). We find that before the financial crisis, Latin American MNCs are characterized by lower debt levels than purely domestic firms. However, afterward the fiscal crisis, we find that the MNCs are characterized by college debt levels. This finding suggests that afterwards the financial crisis, the Latin American MNCs (like many firms) may exist taking advantage of their access to low interest rates in the global majuscule markets.

ane. Introduction

In recent decades, with the globalization of the earth economic system, including the financial markets, many growth and financial opportunities have become available to firms in emerging markets. Specifically, firms tin can now take reward of gratuitous merchandise agreements, increased investment and capital flows, and increased admission to both domestic and international financing. Access to the global fiscal markets is critical for firms to aggrandize and be successful on the international phase. Along with this, even so, managers must acquire to overcome the fiscal obstacles that are inherent in global expansion and make pregnant financing decisions for the house.

There have been numerous studies on the topic, only the capital structure remains a puzzling effect in modern corporate finance. The conundrum is further complicated when information technology comes to examining the majuscule structure of firms in emerging markets, as at that place has been less research focusing on these firms. Specifically, the literature is lacking equally it pertains to the bear upon of internationalization on the majuscule structure of firms in emerging markets and how this association has changed after the global fiscal crunch of 2008. The seminal written report on capital structure past Modigliani and Miller (1958) forms the basis of all capital structure research. At the time, the authors posited that in a world with perfect uppercase markets with no taxes and bankruptcy costs, capital structure is irrelevant. Since then, the theory has evolved, and the consensus is that an optimal capital structure of a firm is a realistic concept motivated past things such as agency costs, bankruptcy costs, taxes, and asymmetric information. Moreover, the optimal capital structure concept is 1 that is equally important to both managers and researchers, specifically as it relates to its impact on firm value. In addition, the optimal capital construction is of the utmost importance for business firm efficiency, profitability, and competitiveness, all of which are critical determinants of economic growth.

The majuscule structure of multinational corporations (MNCs) is of detail involvement, equally the world economy has transformed and is at present dominated by global investment and trade. Co-ordinate to international fiscal management textbooks (Eun and Resnick, 2004; Madura, 2012, MNCs operate in different global economies that are less correlated with each other and are later on more than diversified than are domestic firms. Therefore, they experience more earnings stability (less greenbacks period volatility) and a lower likelihood of bankruptcy. Every bit a event, MNCs should exist able to bear more debt in their capital structure than strictly domestic corporations (DCs). In other words, MNCs should accept higher debt ratios. Interestingly, though, empirical research shows that MNCs have lower debt ratios than DCs because of the additional business organization risks they face as a result of their global operations (Burgman, 1996; Fatemi, 1988; Lee and Kwok, 1988).

This report is particularly of import as it bridges the gap in the capital construction literature and adds to the literature on the impact of the financial crisis of 2008 by providing new insights on the financing behavior of firms in emerging markets before and after the financial crunch. Specifically, the existing literature focuses about exclusively on firms in developed economies, with many studies focusing on US and Eurozone firms. Even so, this study investigates the impact of internationalization on the capital structure of firms in emerging markets before and after the financial crisis, with evidence from five countries in Latin America (Argentina, Brazil, Chile, Mexico, and Peru). First, this study is warranted as it adds to the body of work on the financing patterns of MNCs in the region. Second, we examine whether financing structures changed after the financial crunch. Tertiary, the study is unique in that it specifically looks at the capital structure policy of Latin American firms.

The findings presented in this study document of import new information, as information technology relates to the financing patterns of MNCs and domestic firms in Latin America before and subsequently the financial crisis. Specifically, the report documents the use of lower leverage ratios before the financial crisis for both domestic firms and MNCs, which is consequent with prior empirical studies. On the other hand, the study documents higher leverage ratios for MNCs after the financial crunch, which is consequent with international financial direction textbooks. We surmise that the global fiscal crisis, followed past unprecedentedly low involvement rates aimed at stimulating economies, and access to global capital markets, together make financing with debt a lot more bonny for Latin American MNCs. This is supported past Karagiannis et al. (2010), who investigate the interest rate manual mechanism for the Eurozone and the The states afterward the recent fiscal crisis. The authors discover that in the context of efficient monetary policy, changes in a central depository financial institution's policy interest rate are transferred to retail interest rates, thereby influencing both consumer and business organization lending rates. Also, we detect that international diversification mitigates the negative impact of the home state's political risk on debt financing after the financial crisis in Latin American firms.

The remainder of this paper is organized as follows. Section two presents the research background and hypotheses. Section 3 describes the information. Section 4 discusses the research methodology used in the written report. Section 5 reports the results, Section 6 concludes, and Section 7 presents the limitations of the written report.

two. Literature review

The capital structure of a business firm has always been a significant result for academicians and practitioners akin. In the seminal study past Modigliani and Miller (1958), the authors propose that assuming perfect capital markets and a world with no taxes, the majuscule structure of a business firm is irrelevant to firm value. In a world with corporate taxes, Modigliani and Miller (1963) suggest that the value of a firm is maximized with 100 percentage debt in its capital structure, as interest on debt is revenue enhancement-deductible. Therefore, debt financing is preferred over equity financing. In reality, however, many firms factor in the costs of fiscal distress and bankruptcy and comport only moderate levels of debt in their upper-case letter structure.

Lindner et al. (2018) analyze the extant literature on the relationship between internationalization and capital structure policy. Using a meta-assay of 31 studies, including 223,658 firm observations and at least 2 carve up samples, the authors investigate the management, size of any effect, and multiple contingencies of the relationship. Their results show that MNCs are characterized by lower debt ratios than domestic corporations, supporting the statement that at that place are increased risks and agency costs associated with international operations.

Using The states firms, Park et al. (2013) examine whether there is a difference betwixt the leverage policies of MNCs and domestic corporations (DCs) past attempting to respond two main questions: (1) Practice MNCs have higher or lower debt levels than DCs? (ii) To render to the optimal debt level following an economic stupor, practise MNCs conform their debt level faster or slower than DCs? Subsequently controlling for the usual firm characteristics related to debt levels, the authors notice that the debt levels of MNCs are not much lower than those of DCs. Interestingly, the authors also find that in that location is no significant difference in the debt maturity structure, speed of debt level changes, or the issuance of debt vs. equity between MNCs and DCs. Still, afterward analyzing not-The states MNCs (Commonwealth of australia, Canada, France, Deutschland, Japan, and the UK), the authors discover that not-The states MNCs upshot securities more often and modify debt levels faster than their domestic counterparts.

The following sections talk over the capital construction theories and other pertinent literature related to firm internationalization and capital structure policy.

2.1. Capital structure theories

Myers (1984) put forth the pecking order theory. When examining MNCs and the level of debt, the pecking social club theory posits that a higher level of internationalization leads to lower debt levels. MNCs are more diversified than are DCs, having many divisions in many countries and industries, which naturally gives them access to an extensive network of internal financing markets. These internal markets provide cheaper sources of financing when compared to external sources of financing (Gonenc and de Haan, 2014). Therefore, nosotros expect an changed relationship betwixt MNCs and debt levels based on the pecking order theory (Shleifer and Vishny, 1992; Stein, 1997).

Jensen and Meckling (1976) posit that the accessibility of gratuitous cash menstruum leads to an bureau problem, which reduces the value of the firm. Bureau cost theory predicts a negative human relationship between MNCs and debt levels, every bit there is more information asymmetry because MNCs are spread beyond several countries, making it more than difficult and costly to get together and process information, which translates into less monitoring (Doukas and Pantzalis, 2003). As a effect, Chen et al. (1997) point out that there is a higher probability that managers will employ funds for non-value-maximizing purposes. This leads to a college cost of debt, and every bit such, the capital structure is characterized past less debt.

In the trade-off theory, firms brand upper-case letter structure decisions based on the advantages and disadvantages of using more than debt. Gonenc and de Haan (2014) point out that MNCs may have subsidiaries in geographic locations with favorable tax rates or involvement deduction regulations. Thus, these firms accept the opportunity to maximize their tax shield advantages. Moreover, Chen et al. (1997) and Doukas and Pantzalis (2003) posit that a higher level of geographic diversification might reduce a firm's business risks, thereby reducing the possible financial distress and bankruptcy costs. Therefore, MNCs may concur more debt in their capital letter structure equally a event of the advantages of international geographic diversification.

2.2. Exchange rate risk

Exchange rate adventure is the risk that fluctuations in currency will adversely touch on the demand, supply, price, and costs associated with a business firm. Choi (1989) investigates the relationship betwixt a house's capital structure decisions and strange exchange risk. The writer finds that the college the firm'southward foreign exchange adventure exposure, the lower the optimal level of debt in the majuscule structure. Moreover, Bartov et al. (1996) observe that foreign exchange rate take a chance affects the earnings and cash flows of a firm as well as the discount rate used to value these cash flows. Equally a issue, MNCs with greater strange exchange adventure exposure are expected to hold less debt.

Burgman (1996) too finds that the college the sensitivity of a firm's cash flows and earnings to strange exchange rate changes, the lower the optimal level of debt. However, the writer goes further and argues that MNCs with higher economical exchange rate exposure should have higher optimal levels of debt, by pointing out the difference between transaction and economic commutation rate exposure of firms. According to the author, MNCs are able to hedge transaction exposure to substitution rate fluctuations somewhat easier than hedging (or fifty-fifty measuring) economic exchange rate adventure. Moreover, an MNC has the ability to apply its financing policy to manage economic exchange charge per unit risk exposure by raising foreign currency-denominated capital letter. The writer surmises that since it usually is easier and cheaper to issue debt rather than equity in global markets, MNCs' foreign debt holdings may rise to hedge their economic exchange charge per unit exposure. As a result, there could be a positive relationship between foreign exchange rate sensitivity and MNCs' increased use of debt in their capital structure.

ii.three. Political gamble

In addition to substitution charge per unit risk, MNCs are besides field of study to political risk. Political risk is the chance that political events, decisions, policies, or conditions will have a pregnant adverse effect on a firm's business operations. Jodice (1985) highlights examples of political risks, which include confiscation of assets, trade wars, sudden tax rate changes, wars, social unrest, political coups, political violence, international disputes, authorities government changes, and regulatory restrictions. Akhtar (2005) argues that MNCs with greater political risk exposure should have less debt in their uppercase structure as a result of the increased probability of financial losses.

Burgman (1996) points out that it is challenging to completely diversify political risk considering of the uniqueness of foreign straight investment. Notwithstanding, the author posits that MNCs can apply their debt financing policy to mitigate their expected wealth losses due to political risk. Specifically, MNCs can minimize the impact of political risk by financing primarily with local debt, or past using a syndicate of international banks to facilitate whatsoever borrowing. Therefore, the author surmises that MNCs operating in countries characterized by high political adventure should take a greater proportion of debt in their uppercase structure.

2.4. Diversification and capital construction policy

Chkir and Cosset (2001) examine the relationship betwixt MNCs' debt policy and their diversification strategy. The authors discover that MNCs with a loftier level of international and production diversification have less default risk. In improver, the MNCs that are less diversified take less debt in their majuscule structure than the MNCs that are more than diversified. Moreover, according to the authors, international and product diversification together enable MNCs to savor higher levels of profitability than the MNCs post-obit just one diversification strategy. As well, the authors conclude that the impact of agency costs and default take a chance on the leverage ratio of MNCs is dependent on their diversification strategy.

2.five. Latin American firms and uppercase structure policy

The capital structure policy of firms in Latin American (and other developing) countries is unique. These countries are characterized by less developed and sophisticated capital markets, financial institutions, and legal, regulatory, and judicial environments, equally well as less stable macroeconomic environments. Moreover, the aforementioned factors all have a significant bear on on the optimal majuscule structure of Latin American firms through their ability to tap into external sources of financing (McLean et al., 2012). Khurana et al. (2006) investigate the relationship betwixt greenbacks flow sensitivity and capital marketplace development. The authors find that firms experiencing capital limitations (such as firms in developing countries) will defer immediate spending in favor of financing future growth opportunities. In contrast, firms that are able to tap into external financing do not need to depend solely on their internal cash flows to have advantage of real growth opportunities. As a effect, this contributes to higher economic growth, which is pregnant for developing countries. Gonenc and de Haan (2014) conclude that more than developed capital letter markets markedly touch on the level of debt financing for firms in developing countries.

Fauver et al. (2003) posit that a firm's ability to tap into external sources of financing upper-case letter is straight related to the level of sophistication of the home country's capital markets. The more than developed the capital markets, the easier it will be for firms to access external financing. Too, Beloved (2003) points out that capital market place development facilitates firms' access to cheaper external capital and allows these developing country firms to have reward of the high growth opportunities that are inherent in such markets. Without this upper-case letter market development, developing country firms are viewed as existence riskier and are characterized by a higher cost of capital, which limits positive NPV investments. On the other hand, as the fiscal markets become more sophisticated, developing state firms accept access to cheaper external capital, are viewed every bit being less risky, and savor a lower cost of capital, more growth opportunities, and by extension, more than positive NPV investments equally a direct outcome of the cheaper sources of uppercase (Love, 2003; McLean et al., 2012).

Elnahas et al. (2018) investigate the effect of natural disaster chance based on firms' capital letter construction policy. The authors find that firms located in more disaster-prone (riskier) areas are characterized past a lower level of leverage than those in less disaster-prone regions. They surmise that the systematic departure in leverage is directly related to college operating uncertainty, greater costs of capital, and less fiscal flexibility. The authors conclude that firms consider natural disaster risk in their uppercase structure decisions.

ii.half-dozen. Effects of the fiscal crisis on capital structure policy

Huang et al. (2020) examine the being of debt policy persistence and the result of an economical shock such as a fiscal crunch. The authors find that capital construction policy and debt maturity policy are persistent. Moreover, they find that the macro-level financial crunch drastically decreases the persistence of debt policy, but micro-level ecology risk has no effect on the debt policy persistence. The authors conclude that the firms' debt policy persistence will more than likely modify as a result of meaning macro-level systemic adventure (such as a financial crunch) rather than with micro-level non-systemic adventure.

Tang and Upper (2010) investigate debt financing afterward financial crises. The authors detect that there is a marked reduction in debt financing in the nonfinancial individual sector. Withal, they find far fewer signs of debt reduction in the corporate sector after fiscal crises. Moreover, concerning the 2008 financial crisis, the authors find that corporate debt relative to GDP increased during the initial stages of the crisis in well-nigh countries, only partly due to firms drawing on previously arranged lines of credit. Harrison and Widjaja (2014) investigate the effect of the 2008 financial crisis on the capital letter structure policy of firms. As in previous studies, the authors observe that tangibility and firm size are positively correlated with leverage, while profitability, liquidity, and market-to-book (MTB) ratio are negatively correlated. Specifically, the authors find that profitability is not a strong determinant of capital structure decisions after the financial crunch because of firms' weaker internal financing options. More than importantly, they observe a stronger impact of the MTB ratio, indicating that firms favor debt financing after the financial crisis.

2.7. Bear witness from other emerging markets

Agnihotri and Bhattacharya (2019) investigate the effect of related political party transactions (RPTs) on firms in emerging economies with a specific look at 367 manufacturing firms in Bharat. The authors find that RPTs, (e.g., cash injections, credit provisions, or debt guarantees), have a negative effect on internationalization. They besides find that business group buying enhances the negative relationship, while strange shareholding weakens the relationship between RPTs and internationalization.

Using a survey of firms in Lebanon, Mora et al. (2013) examine the motivations behind both large and pocket-size firms' decisions to undertake strange currency borrowing in an economic system characterized by domestic banks. The results evidence that exporters are more likely to incur dollar debt considering of the natural hedge against commutation rate risk. Also, firms create a hedge by passing on any currency risk to customers and suppliers. In add-on, the authors find that more transparent firms are more probable to employ dollar credit, and firms that rely on formal financing are more likely to access dollar debt than firms that rely primarily on breezy funding. Interestingly, the authors notice that profitable firms are less likely to contract dollar debt.

Using a sample of Centre Eastern and Northward African (MENA) firms over the period 1998–2011, Guyot et al. (2014) examine whether strange fiscal shocks have an bear on on the cost of equity in emerging markets. The findings show that external shocks can increment the cost of uppercase in mature emerging markets. Specifically, the authors conclude that the international cost of equity can increment for large emerging markets during times of foreign fiscal crises where emerging-market firms are characterized by higher global betas leading to higher adventure premiums.

Neaime (2012) investigates the global and regional financial linkages between MENA stock markets and the more developed capital markets, and on the intra-regional fiscal linkages betwixt MENA countries' uppercase markets after the 2007 Us financial crisis. The results show that curt-term or long-term capital flows accept so far non been a dependable source of financing for development and growth in MENA countries. Moreover, FDI is concentrated in a number of emerging-market economies, not including MENA countries, and MENA countries have received very fiddling financial flow since the fiscal crisis.

3. Information

Nosotros use a sample of 706 Latin American firms from the period 1996–2016. We selected all firms listed on the stock exchanges of Buenos Aires (Argentina), Sao Paolo (Brazil), Santiago (Chile), United mexican states City (Mexico), and Lima (Peru). Fiscal information was obtained from Economatica, a database that contains annual financial information, including long-term debt, sales, net profits, and avails for all the public firms on these five major Latin American stock exchanges. In improver to assembling the financial information database, we perform a thorough test of the data of each firm using its website, annual reports, archival data, and filings with local regulators. Nosotros identify a firm'due south year of creation, whether it had international operations, the year that it established international services, and other variables, which are described below as well as in Table 1 . Our final sample contains vii,012 firm-year observations. Table 2 presents the distribution of observations by country. The country with more observations in our sample is Brazil (46 %). The Sao Paolo stock exchange is the biggest in South America. The other countries in our sample have a very similar distribution in the number of observations: Argentina (sixteen %), Chile (14 %), Mexico (14 %), and Peru (x %).

Table 1

Definition of variables.

Variable	Definition
Leverage i,t	Firm I'due south long-term debt scaled by total debt plus market value of equity in year t
International i,t	Dummy variable that equals ane if house i has international operations in year t
After_FC i,t	Dummy variable that equals ane if the observation corresponds to years after 2008
Political_Risk t	Home state political chance in year t obtained from the International Country Take chances Guide (ICRG) developed by the Political Risk Services Grouping
Size i,t	Business firm i's log of full assets in Us$ in twelvemonth t
Age i,t	Firm i'southward log of years from the date of incorporation in year t
FCF i,t	Firm i'due south EBIT plus depreciation and amortization minus total taxes scaled by the book value of assets in year t
Collateral i,t	Firm i'due south volume value of tangible avails divided by the book value of assets in year t
NDTS i,t	Business firm i'southward total annual depreciation expense divided by the book value of assets in twelvemonth t
ROA i,t	Business firm i's EBIT divided by volume value of assets in year t
Growth i,t	Firm i'south marketplace value of common disinterestedness divided past the volume value of mutual equity in year t
Exchange_Risk t	Standard deviation of the monthly effective exchange rate of each country in year t

Tabular array two

Distribution by country.

Country of Origin	Number	%
Argentina	one,110	16 %
Brazil	3,209	46 %
Chile	1,012	14 %
Mexico	1,000	14 %
Peru	681	x%
Full	seven,012	100%

3.1. Variables

The dependent variable is the firms' debt level (leverage _i,t) defined equally the firms' long-term debt scaled by full debt plus market value of equity in year t. Our primary explanatory variables are International _i,t, which is a dummy variable that equals 1 if firm i has international operations in yr t, or goose egg otherwise, and After_FC _i,t, which is a dummy variable that takes the value of 1 for observations after the financial crisis of 2008, or cipher otherwise. We also include equally controls, variables that are determinants of the house'south leverage level based on previous studies. We include the level of political risk of the firm's home country. Political_Risk _t is the home state political risk alphabetize in year t obtained from the International Country Risk Guide (ICRG) developed by the Political Hazard Services Grouping. Higher numbers denote higher political risk in the country. The ICRG quantitative analysis is based on 22 weighted variables grouped into political, fiscal, and economic hazard categories. Firms based in a state with a high level of political uncertainty might be perceived as riskier and, therefore, present lower levels of debt than firms in other countries. We too add as command variables the firms' size, age, level of free cash flow, amount of collateral, net-debt tax shield, profitability, and foreign exchange risk. Size _i,t is the size of the firm, and it is equal to business firm i'south log of total assets in US$ in year t. Previous studies have found that larger firms tend to be more than diversified and have more resources and, therefore, nowadays lower default risk (Chkir and Cosset, 2001). Age _i,t is the age of the business firm. It is equal to firm i's log of years from the appointment of incorporation. Older firms might have more stable earnings, and therefore they might be perceived to accept lower default gamble, and consequently, higher levels of debt financing. FCF _i,t is the business firm's free greenbacks flow. Information technology is defined as firm i's EBIT plus depreciation and amortization minus full taxes scaled by the book value of avails in year t. Collateral _i,t is the tangible value of assets of the firm, and it is equal to business firm i'southward book value of physical assets divided past the book value of assets in year t. Firms with a more than tangible value of assets might take higher levels of debt because they might be perceived as having lower default risk. NDTS _i,t is the nondebt taxation shield. This variable is defined as firm i's total annual depreciation expense divided past the book value of assets in year t. Firms with higher nondebt tax shields are expected to accept lower leverage, equally the tax benefits of leverage are relatively less valuable. ROA _i,t is the return on avails, and it is equal to house i'due south EBIT divided by book value of assets in year t. The pecking order theory of capital construction argues that if a firm is assisting, and then it is more than probable to apply internal sources of financing (Myers, 1984). Therefore, a negative relation between profitability and leverage is expected. Growth _i,t is the MTB ratio, a measure of growth opportunities, and information technology is calculated as house i's marketplace value of common disinterestedness divided past the volume value of mutual disinterestedness in twelvemonth t. Previous studies have used this measure to proxy for time to come growth opportunities. Firms with more than growth options are expected to accept higher information asymmetries and agency costs. Therefore, they are expected to accept lower debt levels. The variable Exchange_Risk is the home state commutation risk measured as the standard deviation of the monthly effective commutation rate for each country in twelvemonth t. The descriptive statistics are presented in Table three . The mean value of leverage is 0.32. Around 45 % of the observations accept international operations. The average age of the sample is 36 years, and the average return on avails is 2%. More than half of the observations correspond to the period afterwards the financial crisis.

Table iii

Descriptive Statistics.

Variable	Lower Quartile	Mean	Median	Upper Quartile	Std Dev
Leverage	0.08	0.32	0.27	0.51	0.27
International	0.00	0.45	0.00	1.00	0.50
After_FC	0.00	0.55	1.00	1.00	0.49
Political_Risk	0.63	0.65	0.69	0.74	0.15
Size	xi.78	13.04	thirteen.xiii	xiv.40	1.97
Age	3.04	3.58	3.78	4.22	0.91
FCF	0.05	0.eleven	0.11	0.18	0.18
Collateral	0.fourteen	0.35	0.35	0.54	0.25
NDTS	0.02	0.03	0.03	0.04	0.03
ROA	0.00	0.02	0.03	0.07	0.eighteen
Growth	0.39	68.10	0.98	2.41	427.l
Exchange_Risk	ii.20	3.88	iii.40	5.11	2.22

4. Methodology

Nosotros approximate the coefficient of our models using generalized least squares (GLS) methods for panel data with correction for heteroscedasticity and console-specific autocorrelation. We do not use stock-still-effects models because this would driblet some critical variables from the assay that do not change over time. Likewise, the Hausman test suggests that the random-furnishings model is adequate. Specifically, the difference in the coefficients obtained from the fixed-effects and random-effects models for our base configuration is not statistically meaning (chi2 = 10.23, p-value = 0.14). We also run the Breusch and Pagan (1980) Lagrange Multiplier test to evaluate whether a random upshot model is preferred to a puddle OLS regression interpretation. Based on the test results (chi2 = 7,781, p-value < 0.0001), we conclude that the random-outcome model is appropriate because at that place is evidence of significant differences across firms in the sample.

We judge the following model to explore the effect of internationalization and the financial crisis on the firms' capital letter structure:

Base of operations Model

Leverage_i,t=α₀ + α_aneInternational_i,t + α₂ After_FC_i,t+α_threePolitical_Risk_t + α_four Size_i,t + α_v Age_i,t α_{half dozen} FCF _i,t + α₇ Collateral _i,t + α₈ NDTS _i,t + α_nine ROA _i,t + α_x Growth _i,t + α₁₁ Exchange_Risk + Land Controls + Yr controls + Industry Control + e _i,t-one

where the main variables of interest are International _i,t, which is a dichotomous variable equal to one if firm i has international operations in yr t, and zero otherwise, and After_FC_i,t, which takes the value of 1 if the ascertainment corresponds to a period after the fiscal crisis of 2008, and zero otherwise. We include the interaction of After_FC_{i, t} with the other independent variables to make up one's mind whether the upshot of the control variables on leverage is different afterwards the financial crisis. Also, we include a iii-manner interaction with International_i,t, After_FC _{i, t} , and the remainder of the explanatory variables to explore whether the determinants of debt financing take a different impact on Latin American MNCs after the financial crunch.

To examination whether our model has an omitted variable (endogeneity) trouble, we run the Ramsey (1969) test on our base of operations model. Given that the traditional Ramsey (1969) test is designed for pool OLS regressions, we include the correction for panel data models detailed in Santos Silva (2016). The results do not reject the naught hypothesis that the model has no omitted variables (F-test = 2.01, p-value < 0.11). Therefore, our model is correctly specified.

5. Results

Tabular array 4 presents the results of the univariate assay. For all years under analysis, there is no significant departure in the debt ratio levels of MNCs and domestic firms. Even so, for the catamenia before the financial crisis, MNCs accept lower debt ratios compared to firms with simply local operations. The opposite holds true later on the financial crisis, where MNCs have college debt ratios than domestic firms. Our univariate results show that after the financial crisis, MNCs are perceived as being less risky, and therefore accept the ability to enjoy higher levels of debt. In all the years under review, MNCs are bigger (size), older (more established), more profitable, and have higher gratis greenbacks flow levels.

Table 4

Difference in Ways Analysis.

Console A. Full Sample
	Local	International	Difference
Leverage	0.329	0.322	0.007
Size	12.839	13.358	0.518	***
Age	3.351	iii.873	0.522	***
FCF	0.107	0.139	0.032	***
Collateral	0.340	0.369	0.029	***
NDTS	0.034	0.368	0.335	**
ROA	0.018	0.037	0.019	***
Growth	87.610	65.290	22.320	***

Panel B. Earlier the Financial Crisis
	Local	International	Difference
Leverage	0.330	0.314	0.016	***
Size	12.540	12.839	0.299	***
Age	3.340	3.855	0.516	***
FCF	0.111	0.159	0.049	*
Collateral	0.421	0.394	0.027	***
NDTS	0.038	0.040	0.002	*
ROA	0.018	0.043	0.025	***
Growth	153.4	130.9	22.5	***

Console C. Later the Financial Crisis
	Local	International	Difference
Leverage	0.327	0.340	0.014	***
Size	13.090	13.762	0.672	***
Age	three.360	three.866	0.506	***
FCF	0.104	0.124	0.020	**
Collateral	0.271	0.348	0.077	***
NDTS	0.031	0.032	0.001	*
ROA	0.018	0.320	0.302	***
Growth	14.0	18.two	4.2	***

Tabular array five presents the regression results. The starting time cavalcade shows the results for the base of operations model. Our results bear witness that Latin American MNCs practise non have significantly different leverage ratios compared to firms in the region with merely local operations. The coefficient of the variable International is not significant. Subsequently the financial crunch, all firms in Latin America present lower debt ratios. It seems that after the financial crisis, fifty-fifty though the global interest rates were lower, firms in the region found information technology difficult to go more debt in their capital construction as they might be perceived to be riskier. Every bit expected, firms in home countries with college political risk profiles are recognized to be risker and present lower levels of debt. The coefficient of the variable Political_Risk _t is negative and statistically significant (-0.1376, p-value < 0.05). Consistent with previous findings in the literature (Aggarwal and Kyaw, 2010), it seems that firms that are bigger, older, and with more collateral resources show college debt ratios in Latin America. The coefficient of the variables Size_i,t (0.0383, p-value < 0.01), Age (0.0232, p-value < 0.05), and NDTS_i,t (0.5435, p-value < 0.01) are all positive and statistically pregnant. Latin American firms are perceived to have more than resources and feel, and therefore are less risky and have fewer information asymmetry bug. Consistent with the pecking social club theory, profitable firms and companies with higher growth prospects present lower debt ratios.

Tabular array 5

Regression Results Model one.

	Coeff.	t-stat		Coeff.	t-stat		Coeff.	t-stat
International	−0.0209	(−1.19)		−0.007	(−0.33)		−0.009	(−0.43)
After_FC	−0.0349	(−three.14)	***	−0.426	(−iv.00)	***	−0.656	(−iv.41)	***
Political_Risk	−0.1376	(−2.14)	**	−0.285	(−3.21)	***	−0.287	(−3.29)	***
Size	0.0383	(seven.59)	***	0.031	(iv.36)	***	0.029	(4.19)	***
Age	0.0232	(ii.29)	**	0.020	(1.64)	*	0.021	(ane.69)	*
FCF	−0.1871	(−iii.51)	***	−0.107	(−1.41)		−0.108	(−1.41)
Collateral	0.0823	(2.34)	**	0.146	(three.nineteen)	***	0.153	(3.44)	***
NDTS	−0.5435	(−2.27)	***	−0.552	(−1.97)	**	−0.556	(−one.97)	**
ROA	−0.3178	(−4.81)	***	−0.189	(−2.05)	**	−0.173	(−1.83)	*
Growth	−0.0005	(−ix.93)	***	0.000	(−8.58)	***	0.000	(−viii.42)	***
Exchange_Risk	0.0096	(7.08)	***	0.008	(4.ninety)	***	0.008	(4.99)	***
After_FC*International				0.257	(2.98)	***	0.482	(ii.64)	***
After_FC*Political_Risk				0.344	(three.53)	***	0.397	(3.11)	***
After_FC*Size				0.016	(2.16)	**	0.029	(iii.04)	***
After_FC*Age				0.007	(0.63)		0.019	(i.32)
After_FC*FCF				−0.150	(−ane.53)		−0.062	(−0.54)
After_FC*Collateral				−0.093	(−i.76)	*	−0.091	(−1.75)	*
After_FC*NDTS				−0.122	(−0.32)		−0.653	(−ane.47)
After_FC*ROA				−0.214	(−ane.96)	**	−0.264	(−ii.eleven)	**
After_FC*Growth				0.000	(1.34)		0.000	(0.lxxx)
After_FC*Exchange_Risk				−0.006	(−1.85)	*	−0.005	(−1.86)	*
International*After_FC*Political_Risk							0.072	(2.51)	**
International*After_FC*Size							−0.027	(−2.53)	**
International*After_FC*Age							−0.030	(−1.58)
International*After_FC*FCF							−0.204	(−1.45)
International*After_FC*Collateral							−0.012	(−0.18)
International*After_FC*NDTS							one.215	(ii.08)	**
International*After_FC*ROA							0.057	(0.31)
International*After_FC*Growth							0.000	(0.40)
International*After_FC*Exchange_Risk							0.001	(0.38)
Intercept	−0.187	−2.24	**	−0.030	−0.28		−0.013	(−0.12)
Year Dummies	Included			Included			Included
Industry Dummies	Included			Included			Included
Country Dummies	Included			Included			Included
Due north	7012			7012			7012
R2	0.nineteen			0.31			0.34

The second column presents the results of the base model and the interaction of the variable denoting observations after the financial crisis (After_FC_t) and the determinants of leverage included in this study. The results show that later on the financial crisis, Latin American firms with international operations have more than debt in their capital structure compared to domestic firms; the coefficient of the interaction term of After_FC_t and International_i,t is positive and statistically significant (0.257, p-value < 0.01).This finding is consistent with the trade-off theory that predicts that a higher level of geographic diversification might reduce firms' business risks, thereby reducing financial distress and bankruptcy costs. In addition, there is widespread consensus that the unprecedentedly low global interest rates have undoubtedly had an impact on financing decisions and, as a issue, have influenced the debt levels that Latin American firms have in their capital construction. Latin American firms with international operations are better prepared to have access to meliorate financing terms. We also find that the positive result of size on the leverage ratio of Latin American firms is stronger afterward the financial crisis. The coefficient of the interaction betwixt After_FC _i,t and size is positive and meaning (0.016, p-value < 0.05). After the financial shock of 2008, larger firms in Latin America were perceived to be more prepared to take stable earnings, reducing the risk of bankruptcy, as they are more likely to follow a strategy of diversified business. In addition, the negative effect of profitability on the level of debt financing is stronger later on the fiscal crisis. The interaction coefficient of After_FC _i,t and ROA is negative and pregnant (-0.214, p-value < 0.05). After the financial crisis, more profitable firms in Latin America prefer to use other financing options rather than debt.

The third column shows the three-way interaction amid the determinants of leverage included in the base of operations model, the dummy variable indicating Latin American firms with international operations (International_i,t), and observations after the fiscal crunch. Three interesting results emerge from this analysis. Starting time, our results show that the negative outcome of the home country's political run a risk on leverage is less pronounced for firms with international operations subsequently 2008. The coefficient of the interaction of Political Chance _t, After_FC _i,t, and International is positive and statistically significant (0.072, p-value < 0.05). Latin American MNCs located in dwelling countries with loftier political adventure present greater leverage ratios compared to firms with only local operations later the fiscal crisis. International diversification mitigates the negative touch of the home country's political risk on debt financing after the fiscal crisis, as these firms are perceived to take the resources to mitigate the challenges and doubtfulness nowadays in their dwelling country. 2nd, even though, equally discussed previously, size should have a positive relationship with leverage, our results show that larger Latin American MNCs after the financial crisis have lower information asymmetries, making disinterestedness issues more attractive. The coefficient of the interaction of International, After_FC _i,t, and size is negative and significant (-0.027, p-value < 0.05). Third, Latin American MNCs should be meliorate prepared to exploit tax regulations beyond different countries to reduce their taxation liabilities, compared to firms with only local operations (Homaifar et al., 1998). Therefore, nosotros notice that Latin American MNCs have higher levels of nondebt tax shields, leading to lower levels of debt financing. According to our results, this is more marked after the fiscal crisis. The coefficient of the interaction term amongst International _i,t, After_FC _i,t, and NDTS _i,t is positive and significant (1.215, p-value < 0.05).

We run some robustness checks to examination the validity of our findings. We test the model for sensitivity to the particular measures we used to operationalize our constructs. Using several alternative measures of the country political risk, such as the regulatory quality and the rule of constabulary of the domicile state (LaPorta et al., 1998) and the Organization for Economic Cooperation and Development's yearly ranking of the level of political gamble in each state (OECD, 2016), we obtain results similar to those described to a higher place. Nosotros also move the definition of the After_FC _i,t variable to 2007 and 2009. Fifty-fifty though the fiscal crisis began in March 2008, several preceding events could have an impact on Latin American firms' capital structure. In 2006, housing prices started to fall, and in 2007 U.s.a. fiscal institutions stopped lending to each other. On the other hand, the effects of the financial crisis might have arrived with some delay in some Latin American countries. Fifty-fifty with these definitional changes in the After_FC _i,t dummy variable, our results remain the same. We also use other measures of leverage, such equally total debt divided by total assets, with similar results.

six. Determination and implications

Multinational corporations (MNCs) enjoy the advantages and disadvantages of operating in a global environment. This means that, unlike their domestic counterparts, they have to deal with monetary policy of multiple fundamental banks, as well equally macroeconomic and other factors of other nations. Specifically, these MNCs have to deal with commutation charge per unit risk, political risk, varying tax rates, and interest rates in several different countries. Therefore, in forming their capital structure policy, MNCs must consider all of these factors and the impact their financing choices volition have on the firm. To further complicate matters, the 2008 fiscal crunch threw global economies and financial markets into uncertainty, causing MNCs to review their uppercase structure decisions.

To appointment, empirical researchers either ignore Latin American firms completely or speculate that their capital structure decisions are similar to those of firms in other more advanced countries. This report looks at the affect of internationalization on the capital letter structure of firms in emerging markets before and afterward the fiscal crunch of 2008, with prove from five countries in Latin America (Argentina, Brazil, Republic of chile, Mexico, and Peru). This is warranted, equally it adds to the body of piece of work on the financing decisions of MNCs and specifically examines whether financing decisions changed after the fiscal crisis. The study is unique in that it examines explicitly Latin American firms, given that about research in the area investigates the United states or Euro-surface area firms.

The results indicate that, for the full sample, there is no statistical departure in the uppercase structure policy of MNCs and domestic firms in Latin America. Yet, we find that before the financial crisis, Latin American firms with international operations (MNCs) are characterized past lower debt levels, consequent with the perspective that MNCs are perceived to be riskier because of increased political risk and exchange risk and confront a college cost of debt, leading to lower debt levels. Nevertheless, afterward the financial crisis, we find that the MNCs are characterized by higher debt levels. This finding suggests that later the financial crisis, Latin American MNCs (like many firms) may be taking advantage of their access to depression global involvement rates in the international uppercase markets. Domestic firms are not internationally diversified; they do not accept access to these global capital markets and are generally deemed to be riskier, then they cannot take reward of these low global interest rates. Therefore, their capital construction is characterized past a lower level of debt.

The negative clan between leverage and profitability suggests that all firms in our sample still adopt to finance their investments using internal financing rather than external financing as a upshot of the higher costs of external financing. The pecking order theory supports this finding. Nosotros observe a positive association between leverage and collateral. These findings are supported by the trade-off theory, which suggests that firms with more collateral are expected to event more debt, as there is less risk of default. Therefore, our results signal that the pecking club and merchandise-off theories play an important role in the capital structure policy of Latin American MNCs and domestic firms.

7. Future research

The study has some limitations that tin be addressed in future research. Offset, we analyze publicly traded Latin American firms considering private firms rarely disclose fiscal information. Publicly traded firms tend to exist the largest in the country and are subject field to boosted scrutiny past financial markets. Thus, in futurity studies, investigators can clarify the capital structure and its determinants of small firms and private firms in the region. 2d, we study firms in Latin America because the similarities among countries facilitate comparisons, and this has been an understudied region of the earth. In future research, investigators can analyze firms in other emerging markets and compare their findings to the ones presented here. Third, we take been constrained by the availability of data, and thus nosotros exercise non mensurate the level of international diversification of Latin American MNCs using a continuous variable. Futurity research could contain a variable measuring the degree of internationalization of firms in the region. Quaternary, Goodell (2020), in exploring several areas for possible research dealing with COVID-nineteen and finance, highlights the outcome of macroeconomic shocks on firms' capital structure. Time to come inquiry could examine the impact of COVID-19 on the capital structure policy of MNCs and domestic firms in Latin America.

CRediT authorship contribution statement

Mauricio Melgarejo Duran: Conceptualization, Data curation, Methodology, Software, Visualization, Investigation. Sheryl-Ann Stephen: Conceptualization, Writing - original draft, Writing - review & editing, Visualization, Validation.

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Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7323684/

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