Internal Financing of Multinational Subsidiaries: Debt vs. Equity

Posted: 2 Sep 1999

See all articles by Bhagwan Chowdhry

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Abstract

We show that an optimal tax management strategy for financing of subsidiaries by multinational corporations, that takes into account exploitation of tax-loss credits, may involve the use of both intra-firm parent debt as well as intra-firm parent equity. This is in contrast to the textbook argument that suggests a knife-edged subsidiary capital structure that, depending on the tax-rate differential between countries, uses either all debt or all equity. We develop a formal multi-period dynamic model to characterize the optimal dividend repatriation policy and the optimal choice of debt-equity mix. The model generates several testable empirical implications that are consistent with available empirical evidence and several others that have not been either discussed or empirically tested in the literature.

JEL Classification: F23, G32

Suggested Citation

Chowdhry, Bhagwan and Coval, Joshua D., Internal Financing of Multinational Subsidiaries: Debt vs. Equity. Available at SSRN: https://ssrn.com/abstract=5467

Bhagwan Chowdhry (Contact Author)

UCLA Anderson ( email )

Los Angeles, CA 90095-1481
United States
310-825-5883 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://bit.ly/bhagwanUCLA

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India

HOME PAGE: http://bit.ly/bhagwanUCLA

Joshua D. Coval

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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