Faculty of Economics and Business Administration Publications Database

Debt Financing and Sharp Currency Depreciations: Wholly versus Partially Owned Multinational Affiliates

Volume: 146
Number: 2
Pages: 281 - 302
Month: June
ISSN-Print: 0043-2636
ISSN-Online: 1610-2886
Link External Source: Online Version
Year: 2010
Keywords: Foreign Direct Investment; Capital Structure; Ownership Structure; Currency Crises; Corporate Taxation
Abstract: This paper provides empirical evidence on two potential costs of shared ownership of German affiliates abroad. First, in periods of currency crises, wholly-owned affiliates, in contrast to partially-owned affiliates, seem to circumvent financial constraints by accessing capital from their parent companies. In terms of differences in performance regarding sales of both types of firms, wholly-owned affiliates have a significantly better sales performance than partially-owned affiliates in periods of crises. This finding contributes to the evidence that FDI helps in mitigating the negative consequences of sharp currency depreciation, and stresses that this effect works especially through capital inflows to wholly-owned affiliates. Second, the debt financing of partially-owned affiliates is less sensitive to the tax rate suggesting that partially-owned affiliates rely less on international debt shifting than wholly-owned affiliates. This indicates that partially-owned affiliates are less flexible to exploit tax efficient strategies.