TY - JOUR AU - Desai,Mihir A. AU - Foley,C. Fritz AU - Hines,James R., Jr. TI - A Multinational Perspective on Capital Structure Choice and Internal Capital Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 9715 PY - 2003 Y2 - May 2003 UR - http://www.nber.org/papers/w9715 L1 - http://www.nber.org/papers/w9715.pdf N1 - Author contact info: Mihir A. Desai Graduate School of Business Administration Harvard University Soldiers Field Boston, MA 02163 Tel: 617/495-6693 Fax: 617/496-6592 E-Mail: mdesai@hbs.edu C. Fritz Foley Graduate School of Business Administration Harvard University Soldiers Field Boston, MA 02163 Tel: 617/495-6375 Fax: 617/496-8443 E-Mail: ffoley@hbs.edu James R. Hines Department of Economics University of Michigan 343 Lorch Hall 611 Tappan Street Ann Arbor, MI 48109-1220 Tel: 734/764-2320 Fax: 734/764-2769 E-Mail: jrhines@umich.edu AB - This paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of American multinational corporations. The evidence indicates that 10 percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios of American-owned affiliates, and that borrowing from related parties is particularly sensitive to tax rates. Borrowing by American affiliates responds to local inflation and political risks, and is more costly in countries with underdeveloped capital markets and those providing weak legal protections for creditors. Affiliates in environments where external borrowing is costly borrow less from unrelated parties: one percent higher interest rates are associated with 1.4 to 2.0 percent less external debt as a fraction of assets. Instrumental variables analysis reveals that affiliates substitute loans from parent companies for between half and three quarters of the reduced borrowing from unrelated parties stemming from adverse local capital market conditions. These patterns suggest that multinational firms are able to structure their finances in response to tax and capital market conditions, thereby creating opportunities not available to many of their local competitors. ER -