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H. Kent Baker and Leigh A. Riddick

Print publication date: 2012

Print ISBN-13: 9780199754656

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199754656.001.0001

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Multinational Cost of Capital and Capital Structure

Multinational Cost of Capital and Capital Structure

Chapter:
(p.466) 22 Multinational Cost of Capital and Capital Structure
Source:
International Finance
Author(s):

FRANCK BANCEL

USHA R. MITTOO

ZHOU ZHANG

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199754656.003.0022

Financial theory predicts that multinational corporations (MNCs) should have a lower cost of capital and a higher leverage level compared to domestic corporations (DCs) because of their enhanced access to global capital markets and risk diversification across countries. Empirical evidence, however, shows that the answer depends on the MNCs' home and host country factors, such as capital market development, institutional environment, and political stability. While the prediction holds for MNCs based in emerging markets, the opposite is observed for U.S. MNCs that expand into less stable economies. The increased globalization of the product and capital markets in the 1990s has also narrowed the gap in cost of capital between MNCs and DCs and this trend is likely to continue in the future.

Keywords:   multinational corporations, cost of capital, capital structure, international capital markets, business risk

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