What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
What will be an ideal response?
Answer: In theory, MNEs should be able to support greater amounts of debt due to reduced variability of cash flows brought about by diversification across countries. And, because of this reduced risk borne by MNEs, they should also have a lower cost of capital. However, empirical research finds that domestic firms tend to use greater amounts of short and intermediate debt than do MNEs and that the cost of capital is greater for MNEs due to increased agency costs, political risk, exchange rate risk, and asymmetric information.
You might also like to view...
Which of the following is the most comprehensive U.S. law regarding worker safety?
A. Thirteenth amendment B. Fourteenth amendment C. OSH Act D. Rehabilitation Act of 1973 E. Civil Rights Act of 1991
Palladia specializes in the production of beef and produces beef more efficiently than any other country. It buys wheat, which it produces less efficiently than beef, from Rhodia, even though it produces wheat more efficiently than Rhodia
Which of the following theories of international trade supports Palladia's decision to buy wheat from Rhodia? A. The Samuelson critique B. Mercantilism C. Ricardo's theory of comparative advantage D. Adam Smith's theory of absolute advantage E. The Leontief paradox