Internationalisation, capital structure and agency costs : an empirical study of UK multinational firms

Abstract

This thesis is an empirical study on internationalisation, capital structure and agency costs of UK multinational firms compared to UK domestic firms. Using a sample of UK FT350 firms over the period 1996-2015, we examine the impact of internationalisation on capital structure, debt and equity raising decisions and agency costs for multinational firms. This thesis is motivated by the multinational leverage puzzle and the factors which explain this phenomenon. This study also addresses the flaw in the implicit assumption of a constant relationship between internationalisation, capital structure and agency costs without consideration for the level of international exposure. In this thesis, we conduct three empirical studies and employ three econometric techniques to estimate empirical models, namely ordinary least square with fixed effects, two-stage least squares and generalised method of moments. In the first empirical analysis, the study examines the effect of internationalisation on capital structure and at what level multinationality this effect is apparent. The second part of the analysis investigates how internationalisation affects the key determinants of capital structure of multinational firms in comparison to domestic firms. The findings indicate that engaging in internationalisation can increase, decrease or have no effect on capital structure depending on the degree of multinationality. Further analyses on how internationalisation modify key capital structure determinants indicate that profitability is the most important determinants of capital structure for domestic and multinational firm operating at different levels of internationalisation. In the second empirical analysis, the study aims to determine whether the multinational leverage puzzle can be explained debt and equity raising choices of multinational firms. The findings show that multinational firms prefer to raise more equity than domestic firms and debt raising is less or insignificant compared to domestic firms depending on the degree of multinationality. Results cast doubt on the explanatory power of the theoretical expectation the access to international financial markets incentive the use of debt financing. The third empirical analysis examines the capital structure agency costs of debt relationships. The first part of this study investigates how agency costs of debt affect capital structure of multinational firms. The findings indicate that agency costs of debt increase leverage for domestic firms, but decreases leverage for multinational firms, evidencing differences in the effect of agency costs of debt on capital structure decisions of domestic and multinational firms. The second part of empirical chapter three tests the disciplinary role of leverage in minimise agency costs of debt particularly for multinational firms. The evidence indicates that the control effect of leverage on agency costs of debt does not hold for domestic firms but increases agency costs of debt in the case of multinational firms. The results contribute to the literature in four ways. First, internationalisation can result in multinational firms employing lower, higher or similar leverage compared to domestic firms, depending on the level of international activity. Second, “multinationality” limits the explanatory power of capital structure theories in relation to corporate financing behaviour. Third, managers choose equity raising over debt raising, which indicates agency costs. Lastly, results show differences in the impact of debt financing on agency costs for domestic and multinational firms and add to the limited literature on debt monitoring effects on agency costs for multinational firms. The evidence has implications for the literature, practitioners and policymakers. Academics and practitioners need to consider the level of international exposure in examining corporate capital structure and agency costs for multinational firms. Equity holders should be wary of agency costs associated with managers’ capital raising behaviour and consider other corporate governance measures that can minimise the agency costs associated with internationalisation. Policymakers should consider the implications of regulatory policies on the pricing of debt and equity capital on international capital markets and what corporate governance measures can protect the interests of debtholders and equity holders.