Australian multinational and domestic corporations capital structure determinants

Abstract

This study investigates the significance of the determinants of capital structure on a sample of Australian multinational corporations and Australian domestic corporations over the period 1992 to 2001. The determinants of capital structure have captured academic thought for many decades, particularly since Modigliani and Miller (1958). If optimal capital structures do exist and that these structures maximise firm value, obtaining an understanding of the determinants of capital structure is important in obtaining an understanding of the way firms maximise value. Multinational corporations control considerable assets and some multinationals control more assets than that which is controlled by some countries. Decisions about capital structure may have important implications in regards to shareholder wealth effects. Therefore, obtaining an understanding of the determinants of capital structure and the differences between domestic and multinational capital structure is of interest to academics, politicians, shareholders and financiers. The results show that the level of leverage does not differ significantly between multinational and domestic corporations. Using cross-sectional Tobit regression analysis the results show substantial variation in capital structure determinants between multinational and domestic corporations. For both types of organisations growth, profitability and size are significant determinants of leverage. For domestic corporations collateral value of assets is also a significant determinant of leverage. For multinationals, bankruptcy costs and the number of overseas subsidiaries is a significant determinant of leverage. Surprisingly, bankruptcy costs are not significant for domestic corporations. In relation to interaction effects, bankruptcy costs and profitability are significant in explaining multinational leverage relative to domestic leverage. When industry effects are considered the significance of the original determinants remained constant however, some industries became significant. The industry effect was not consistent across domestic and multinational corporations. In relation to time variation in leverage and the determinants of capital structure, both varied across domestic and multinationals over the sample period. Show more