Debt financing puzzle and internationalization

Abstract

Purpose This study aims to examine the relation between long-term debt and internationalization in the presence of the agency costs of debt and business risk. Design/methodology/approach Sample firms consist of 517 non-financial listed firms in Malaysia, with 4,197 firm-year observations from the year 2000 to 2014. This study uses panel data regressions and a series of robustness tests to examine the hypotheses. Findings The results show that multinational corporations (MNCs) are more likely to sustain less long-term debt than domestic corporations (DCs) to mitigate the costs related to agency problem and firm risk. Meanwhile, foreign-based MNCs maintain less long-term debt than local-based firms, and the finding is more significant at a higher degree of internationalization. Robustness tests confirm the negative relations. Research limitations/implications The findings indicate that the ongoing debate on the debt financing puzzle can be explained by internationalization. Moreover, the findings suggest that in addition to the systematic differences between MNCs and DCs, studies on the debt financing and internationalization should also account for the systematic differences among MNCs such as the local-based MNCs, foreign-based MNCs and DCs that later expand their business operations abroad. Practical implications MNCs have to be responsive to the diverse institutional environments as they diversify their business operations geographically. When the adverse effects of internationalization outweigh the benefits, MNCs could use the long-term debt financing decision to mitigate the costs of doing business abroad. This is because debt financing is also a primary concern in the corporate financial decisions for the maximization of shareholders’ wealth. Originality/value This study contributes to the debt financing literature from the international perspective by providing evidence from an emerging market. In addition, this study highlights the importance of recognizing firms by their firm-specific characteristics, such as internationalization, given the systematic differences among firms.

Earnings management and the informational and disciplining role of debt: evidence from Iran

“…Moreover, domestic firms are expected to be less diversified and have a lesser degree of risk tolerance compared to multi-national firms. The study of Khaw (2019) documents that domestic companies are more likely to sustain more long-term debt than multi-national companies to reduce the costs related to agency problems. Thus, we expect that, given the relative weakness of the Institutional environment in Iran, the use of debt as an alternative mechanism for investor protection is likely to serve the interests of shareholders against misaligned managerial incentives.…”

Uluslararasılaşma Düzeyi Üzerinde Farklı Kaynak Unsurlarının Kısa ve Uzun Dönem Etkisi (The Short- and Long-Term Effect of Different Capital Structure on Internationalization)

“…Lee ve Khaw (2019), Malezya'da borsaya kote, finansal olmayan 517 firma verisini kullanarak 2000-2014 dönemi için uzun vadeli borç ve uluslararasılaşma arasındaki ilişkiyi temsil maliyeti ve işletme riski varlığı altında incelemiştir. Elde ettikleri bulgulara göre çok uluslu işletmelerin temsil maliyeti ve firma riski ile ilişkili maliyetleri azaltmak amacıyla ulusal işletmelere göre daha düşük bir uzun vadeli borçlanma düzeyini sürdürdükleri, aynı zamanda yabancı kaynaklı çok uluslu işletmelerin ulusal işletmelere göre daha düşük bir borçlanma düzeyini sürdüklerini, uzun vadeli borçlanma ile uluslararasılaşma arasında negatif bir ilişki tespit ettiklerini belirtmişlerdir.…”

The influence of firm, industry and concentrated ownership on dynamic capital structure decision in emerging market

“…When a firm decides on its financial assistance methods either using debt or equity or even a combination of both, firms need to take into account several influencing factors in their capital structure. Capital structure is undoubtedly a crucial element in the operation of a firm which aims primarily at reducing cost of capital as well as achieving maximum firm value (Khaw, 2019;Musallam, 2020) and serve as strong pillars that lend competitive advantage to a firm (Kumar et al, 2017;Zamzamin et al, 2021). Recognized as an important subject matter of discussion because of its significant influence over firm value, it has been a highly debated issue among researchers and policymakers in the finance literature, covering the developed as well as the emerging markets over the decades worldwide (Haron, 2016;Kumar et al, 2017;Ramli et al, 2019;Khaw, 2019).…”

“…In the past few decades, researchers and policymakers realize the importance of capital structure studies in the emerging market. The body of knowledge starts to examine whether the emerging and developed market landscapes share similar atmosphere and influencing factors in their capital structure decision or are they expected to be different due to different institutional and country specific factors as well as its individual corporate governance system (De Jong et al, 2008;Muchtar et al, 2018;Khaw, 2019). Reacting to this, this study gives a particular attention to the emerging market, particularly in the East Asian region.…”

“…Realizing this fact, there has been an urgent call for a comprehensive review and a post-mortem on the corporate governance system then to restructure the governance system and to look closely at each of its mechanism. Researchers and policymakers then agreed that one of the main mechanisms contributing to sound and effective corporate governance is the ownership structure; thus, this aspect needs to be scrutinized and studied even further (Utama et al, 2017;Khaw, 2019;Musallam, 2020). , Utama et al (2017), Brahmana et al (2019) and Musallam (2020) assert that the East Asian markets including Indonesia are popularly known as having a highly concentrated ownership structure and mostly are family controlled.…”