INFLUENCE OF INTERNATIONAL INVESTMENTS DIVERSIFICATION ON MNE CAPITAL STRUCTURE

Sergiy Tsyganov, Olga Zalisko

Abstract


This paper considers stock investing bias that results from exchange rate risk impact as a factor influencing MNE capital structure. This bias should be considered as a supply factor. International diversification theory recognizes the exchange risk to be one of the most influential factors of investment portfolios returns. It defines investment returns level as well as the total risk and return structure. The impact of this factor on MNE capital structure is theoretically proved from international investments diversification theory point of view. This hypothesis however requires empirical testing. Exchange rate risk affects portfolio investors’ decisions thus creating financial resources supply and influencing corporate capital structure. Stock investing bias arises due to the appearance of exchange rate risks since they transform the risk-free debt securities into risky papers that unlike stocks have the most part of their risk accounting for exchange rate risk. The share of exchange rate risk in the total risk structure of equities is twice less compared to bonds. This decreases the investment attractiveness of debt securities and makes stocks more attractive all others equal

Keywords


MNE capital structure; capital structure factors; Miller-Modigliani theory; Miller theory; international diversification of investment portfolios; direct investments international diversification; stock investing bias; exchange rate risk

Full Text:

PDF>PDF

References


Eun, C. S., & Resnick, B. G. (1994). International Diversification of Investment Portfolios: U.S. and Japanese Perspectives. Management Science 40(1), 140 – 161.

Jõeveer, K. (2013). Firm, Country and Macroeconomic Determinants of Capital Structure: Evidence from Transition Economies. Journal of Comparative Economics 41(1), 294 – 308.

Kraus, A., Litzenberger, R. (1973). A State-Preference Model of Optimal Financial Leverage. The Journal of Finance 28(4), 911 – 922.

Lessard, D. R. (1976). World, Country, and Industry Relationships in Equity Returns: Implications for Risk Reduction Through International Diversification. Financial Analysts Journal 32, 32 – 38.

Lessard, D. R. (1979). Transfer Prices, Taxes, and Financial Markets: Implications of Internal Financial Transfers within the Multinational Corporation. Research in International business and Finance: the Economic Effects of Multinational Corporations Vol. 1. Research in International Business and Finance / [Edited by Robert G. Hawkins]. – Greenwich, Conn.: JAI Press : 101 – 125.

Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and Early-life Experiences: The Effect of Managerial Traits on Corporate Financial Policies. The Journal of Finance 66(5), 1687 – 1733.

Markowitz, H. M. (1952). Portfolio Selection. The Journal of Finance 7(1), 77 – 91.

Miller, M. (1977). Debt and Taxes. The Journal of Finance 32(2), 261 – 275.

Modigliani, F., Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review 48(3), 261 – 297.

Mokhova, N., Zinecker, M. (2014). Macroeconomic Factors and Corporate Capital Structure. Procedia – Social and Behavioral Sciences 110, 530 – 540.

Myers, S. C., Majluf, N. S. (1984). Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have. The Journal of Financial Economics 13(3), 187 – 221.

Rogach, O. I. (2005). Transnatsionalni korporatsii v svitoviy ekonomitsi : Monographiya. Kyiv : Vydavnycho-poligraphichniy tsentr «Kyyivskiy universytet»: 176.

Ross, S. A. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. The Bell Journal of Economics 8(1), 23 – 40.

Solnik, B. H. (1974). An Equilibrium Model of International Capital Market. Journal of Economic Theory 8(4), 500 – 524.

Solnik, B. H. (1974). Why Not Diversify Internationally Rather than Domestically. Financial Analysts Journal 30(4), 48 – 54.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2015 Sergiy Tsyganov, Olga Zalisko

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

ISSN (Print) : 2449-7320

ISSN (Online) : 2449-8726