Internal Financing of Multinational Subsidiaries: Debt vs. Equity
Posted: 2 Sep 1999
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: Suggested Citation