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Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty

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  • Masaaki Kijima
  • Yuan Tian

Abstract

This paper examines the impact of international debt shifting and exchange rate uncertainty on investment and capital structure decisions of foreign subsidiary. We find that debt shifting induces earlier investment, earlier default, higher leverage, and larger ex ante firm value of foreign subsidiary. When debt shifting is not so costly, the optimal leverage of foreign subsidiary increases as the tax rate differential increases. Moreover, when the correlation between exchange rate and foreign cash flow uncertainties is positive (negative, respectively), foreign investment advances as exchange rate uncertainty increases (decreases) as well as the correlation increases. These results reveal that the impact of debt shifting and exchange rate uncertainty on investment and capital structure policies cannot be ignored, supporting existing empirical findings. Copyright Springer-Verlag 2013

Suggested Citation

  • Masaaki Kijima & Yuan Tian, 2013. "Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 36(2), pages 169-197, November.
    • Handle: RePEc:spr:decfin:v:36:y:2013:i:2:p:169-197
    DOI: 10.1007/s10203-012-0129-3
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    Cited by:

    1. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.

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    More about this item

    Keywords

    Multinational companies; Foreign direct investment; Debt shifting; Real options; F31; F34; G11; G33;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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