In theory multinational firms are in a better position than domestic firms to support higher debt ratios. Provide an argument as to why this could be true and discuss the empirical research findings about US based MNEs

What will be an ideal response?

Answer: Access to capital in global markets allows an MNE to lower its cost of equity and debt compared with most domestic firms. The theoretical possibility exists that multinational firms are in a better position than domestic firms to support higher debt ratios because their cash flows are diversified internationally. The probability of a firm's covering fixed charges under varying conditions in product, financial, and foreign exchange markets should increase if the variability of its cash flows is minimized. The diversification argument has been challenged by empirical research findings that MNEs in the United States actually have lower debt ratios than their domestic counterparts. The agency costs of debt were higher for the MNEs, as were political risks, foreign exchange risks, and asymmetric information.