The effects of the cost of foreign internal funds on firms' financing choice of debt vs. internal funding

摘要

This paper examines how the multinational firm's choice of debt or internal funds as a method of financing depends upon the cost of using internal funds. I extend prior research by differentiating between the cost of using domestic versus foreign internal funds for additional investments for multinational enterprises. I predict that foreign funds are more costly than domestic funds because of potential differential costs, including repatriation tax costs and financial reporting costs. I find that my measure of total funds, the sum of cash and short-term receivables, is negatively related to issuing incremental debt. I also examine whether the proportion of total funds represented by foreign funds affects a firm's decision to use incremental debt financing. My proxy for foreign funds is a rough estimate using available Compustat data (foreign assets divided by total assets multiplied by total funds). I do not find significant results with this general measure of foreign funds. Additionally, I test whether firms' FTC positions affect incremental financing decisions. I do not find results with this measure of foreign funds. I further examine the impact of costly foreign funds on the incremental debt financing decision using alternative measures. I examine the differential costs of a subset of foreign funds with the designation and dollar level of permanently reinvested earnings. My results suggest that the change in debt is positively related to the dollar level of permanently reinvested earnings. In addition, in a model that includes the interaction between the dollar level of permanently reinvested earnings and non-binding FTC status, my results suggest that the magnitude of the relationship between the level of permanent reinvestment of foreign earnings and incremental debt financing is greater for firms with non-binding FTC limitations than for firms with binding FTC limitations. Overall, my findings suggest that the source of internal funds makes a difference in firms' use of debt financing. After controlling for investment opportunities with a measure of the difference between the foreign and domestic after-tax return, I find that financial reporting considerations impact the debt (versus internal funds) financing decision.