The cost of capital: U.S.-based multinational corporations versus U.S. domestic corporations

Using firm-level panel data, this paper examines whether the cost of capital (COC) differs significantly between U.S.-based multinational corporations (MNCs) and U.S. domestic corporations (DCs). The results suggest that U.S.-based MNCs have higher COC than U.S. DCs and that industry importantly influences COC. The study also finds that there is a significant time effect on COC, and the time effect follows the trend of the U.S. economic growth rate. Using a Bayesian Markov chain Monte Carlo approach, we estimate jointly cost of equity, cost of debt, and capital structure, and find that the higher cost of capital for MNCs is due mainly to their higher cost of equity and greater use of equity financing; the cost of debt financing does not differ significantly for MNCs versus DCs.     

Return on capital analysis: U.S.-based multinational corporations versus U.S. domestic corporations

We study the difference between U.S.-based multinational corporations (MNCs) and U.S. domestic corporations (DCs) in terms of management efficiency with return on capital as the measure of management efficiency. We use a fixed effect model to account for heterogeneity and/or the time-specific effect and find that MNCs have lower management efficiency than DCs, which holds after we control for the effects of firm size, GDP growth rate, and growth opportunity on management efficiency. One reason for the low efficiency is the MNCs’ inability to manage their assets well relative to DCs. We also find that there is an inverted U-shaped relationship between return on capital and degree of internationalization, which implies an optimal degree of internationalization. Our result does not confirm the recently proposed three-stage model.     

Examination of U.S.-based Japanese subsidiaries: Evidence of the transfer of the Japanese strategic cost management

As a result of global competition, many Japanese companies are now operating in the United States. This article presents a survey of the management accounting methods employed by U.S.-based Japanese manufacturers and documents evidence about the current direction of accounting practices that are being transferred from Japan to the U.S. work environment. The results of the study show that most of the U.S.-based Japanese firms are similar to Japanese domestic firms in their use of management accounting methods of target costing and value engineering, variable costing, and strategic adaptation of traditional methods such as standard costing and budgeting. It is also evident that U.S.-based Japanese affiliates may be influenced by U.S. practices, as shown by significant usage of activity-based costing and internal rate of return for evaluating capital investment projects. This article is an important part of a continuing effort to study the development of management accounting among foreign-owned subsidiaries in the U.S., helping them to meet the challenges of global competition. Additionally, expanding this line of research on foreign subsidiaries that apply world class management accounting practices in other countries may assist U.S. multinational firms in their overseas subsidiaries' operations. Two limitations of this study and, thus, suggestions for future research are identified. First, the data on U.S.-based Japanese affiliates were collected for one point in time. Second, this study did not match each U.S.-based Japanese affiliate with its parent in Japan.     

International operations and voluntary disclosures by U.S.-based multinational corporations

This study uses analysts' ratings of firms' disclosures to examine how the differences between U.S. and foreign disclosure environments affects the voluntary disclosures of U.S.-based multinational corporations. We hypothesize that these different disclosure environments discourage U.S-based multinationals from releasing costly information to competitors. Examining how these differences impact U.S. MNCs' reporting may further our understanding of the relationship between voluntary disclosures and differences among countries' accounting standards. Furthermore, it may explain how convergence of mandated accounting standards might impact voluntary disclosures. Controlling for industry membership, firm size, profitability, earnings-return relations, and capital market activity, we find that U.S. firms with more extensive foreign operations tend to provide fewer voluntary disclosures. These results are most robust for informal and flexible disclosures, such as investor relations, where the findings indicate a negative relation between foreign operations and disclosure.     

Multinationals and stock return comovement

We find that when a U.S. domestic firm becomes a multinational (MNC), its returns comove more with those of existing multinational firms and less with those of purely domestic firms in the following year. This result is robust to a propensity score matching method and an exogenous shock. Turnover comovement and changes in mutual funds' holdings of these MNC initiators further indicate that investors prefer multinationals as a style investment. Moreover, MNC initiators with larger foreign sales experience larger shifts in return comovement. Finally, the effect of MNC initiation on return comovement is relatively weaker for 2000–2016 than for 1979–1997.     

Dividends and Profits: Some Unsubtle Foreign Influences

American corporations earn a significant share of their profits from foreign sources, out of which they appear to pay dividends at rates that are three times higher than their payout rates from domestic profits. Why firms do so is unclear, although this behavior is consistent with the use of dividends to signal profitability. This payout behavior implies that a significant part of the U.S. tax revenue generated by the foreign profits of U.S. corporations arises through the taxation of dividends received by individuals, and that the cost of capital may be higher for foreign than for domestic operations.     

The capital structure of multinational corporations: Canadian versus U.S. evidence

Contrary to the U.S. evidence, we show that Canadian multinational corporations (MNCs) display higher leverage than domestic firms (DCs). This higher leverage is due to lower agency costs of debt associated with MNCs' U.S. operations. We also find that the Canadian firms with international bond market access have higher leverage than firms without such access. Comparison with a U.S. matched sample shows that the sensitivity of leverage to firm-specific factors differs between the two countries, especially for the MNCs samples. Our evidence indicates that capital structures of MNCs are a complex interaction of both home and host country factors and differences in leverage determinants across countries.     

Differences in Factor Structures between U.S. Multinational and Domestic Corporations: Evidence from Bilinear Paradigm Tests

This research investigates the differences in factor structure between U.S. multinational and domestic corporations. We use a multifactor return generating process and investigate whether the constraints imposed by the arbitrage pricing theory are upheld. Our results indicate and domestic corporations are not significantly different. It does appear, however, that there are different prices attached to the risk of U.S. multinational and domestic firms.     

Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policy makers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policy maker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multiperiod proxies or instrumental variables overcomes weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the United States as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shifts approximately $10 billion of additional income out of the United States annually during 2005–2009 relative to 1998–2002 due to varying regulatory costs of shifting.     

Do multinational and domestic corporations differ in their leverage policies?

This paper examines the leverage policies of multinational corporations (MNCs) in comparison to those of domestic corporations (DCs). Prior studies document that MNCs have lower leverage levels. However, our analysis of U.S. firms over the period 1981–2010 reveals that the leverage levels of MNCs are not significantly lower than those of DCs if we control for key firm characteristics related to leverage levels. We also find that MNCs and DCs do not differ significantly in terms of their debt maturity structure, the speed of leverage adjustments, or the propensity to issue debt vs. equity (or vs. not to issue debt). The results suggest that MNCs' financial policies at the corporate level are not significantly influenced by their greater exposures, in comparison to DCs, to market imperfections such as taxes and regulations. Interestingly, however, our additional analysis of MNCs from outside the U.S. reveals that non-U.S. MNCs issue securities more frequently and adjust leverage faster than their domestic peers.     

Cost structures in multinational and domestic banking

Prior research on international banking has proposed many reasons for the multinationalization of U.S. banks but provided little empirical support for its propositions. Using a pooled-time series data set from 1987 to 1990, this study analyzes the ray and expansion path scale economies and expansion path subadditivity of U.S. based multinational banks (MNBs), both at the firm and the plant levels. It also measures and analyzes inefficiencies for these banks. Inefficiencies are measured relative to a ‘thick frontier’ cost function. A similar analysis is conducted for domestic banks (DBs) for comparison purposes. No support is found for the prior belief that similar cost structures exist for MNBs and DBs. In general, we find that MNBs are able to fully exploit economies of scale, and face lesser diseconomies from joint production and lower inefficiencies than DBs.     

Managerial Empire Building and Firm Disclosure

This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, make self‐maximizing decisions that may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such nondisclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that nondisclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post–SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre–SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.     

TO OWN OR TO FRANCHISE?: THE INTERNATIONAL CONTROL DECISION FOR SERVICE COMPANIES

Franchising, which accounts for a significant share of the U.S. domestic service industry, has also become a major strategic alternative in the international expansion of U.S. service firms. This article attempts to explain the international franchising and control decision by U.S.-based service firms in terms of a theoretical framework that borrows from agency theory and transaction-cost analysis. Specifically, it attempts to answer the following question: Why would a well-established service firm choose to operate in certain countries through a franchising agreement whereas in others it would set up a wholly-owned subsidiary? In their empirical test of a sample of over 10,000 international service units that were either owned or franchised by 12 U.S. multinational service companies, the authors find that the most important determinants of the decision to franchise rather than own are the following four: (1) geographical distance from headquarters; (2) extent of cultural differences; (3) years of international experience; and (4) degree of concern about reputation or brand name. Greater geographic and cultural distance make service companies more likely to franchise, as do greater experience and familiarity with international business settings. Greater concern about brand name, by contrast, makes companies more likely to own than franchise. Measures of political and exchange risk have no detectable effect.     

THE CHANGING RISK PROFILE OF U.S.-BASED MULTINATIONAL CORPORATIONS EXPOSED TO EUROPEAN COMMUNITY MARKETS

In this study we investigate the risk characteristics of U.S.-based multinational corporations (MNCs) that conduct much of their business in the European Community. Specifically, we assess the efficacy of a multifactor return-generating model that incorporates the influence of U.S. and European markets. Our results demonstrate that the European market is a significant factor in explaining the time-series behavior of MNC returns, and that the European market influence is stronger since the adoption of the Single European Act. In addition, the reduction in the sensitivity of MNCs to the U.S. market since the Single European Act is cross-sectionally associated with changes in their proportional levels of European sales. The results suggest that the returns of other MNCs expanding into increasingly integrated regional blocs may experience similar changes in their systematic risk profile.     

Capital structure of multinational and domestic corporations – a cross‐country comparison

This study investigates whether the determinants of capital structure between multinational corporations (MCs) and domestic corporations (DCs) vary across Australia, U.S., Japan, U.K. and Malaysia. Results show (i) the debt holding capacity and majority of the explanatory factors vary between DCs and MCs and also across countries; (ii) Australia, Japan, U.K. and Malaysian MCs hold significantly less long‐term debt relative to U.S. firms; (iii) DCs and MCs that operate under an imputation tax system hold significantly less short‐ and long‐term debt; and (iv) DCs and MCs operating under common law have significantly less short‐term debt and significantly higher long‐term debt.     

An outcome-based assessment of international transfer pricing policy

Instead of concentrating on the selection of the optimal transfer pricing method, this paper focuses on the consequences of international transfer pricing for multinational entities. A sample of U.S.-based multinational firms is employed to determine if transfer pricing results in measurable financial outcomes. Results of the study indicate that firms employ international transfer pricing to meet a variety of objectives. The dollar value of international transfers and the foreign sales percentage are both significant explanatory variables for the financial outcomes of these objectives.     

Economic Exchange Rate Exposure of U.S.-Based MNCs Operating in Europe

This study focuses on the economic exchange rate exposure of 168 U.S.-based multinational corporations (MNCs) with foreign operations primarily in Europe. The sampling plan and other refinements may improve the estimation of exposure and detection of relevant determinants. Operating characteristics that represent economic exposure are evaluated for their ability, to explain cross-sectional differences in exposure. More specifically, the degree of imbalance, which is a proxy for matching cash inflows and outflows, and proportion of export sales are able to explain differential exposure. Furthermore, shifts in the degree of imbalance and proportion of export sales are found to significantly explain shifts in exposure.     

Degree of Multinationality and Financial Performance: A Study of U.S.-Based Multinational Corporations

This paper examines the marginal benefits that accrue to U.S.-based multinational corporations through increased international investment. Specifically, the study seeks to determine if increased degrees of multinationality produce additional benefits for multinational firms in terms of excess returns and/or reduced risk. The results indicate that during the period studied, the degree of multinationality did not have a significant influence on the risk and return performance of the sample firms. Thus, the study supports the findings of Qian (1996) and Siegel et al. (1995, 1995A) who report that the advantages enjoyed by multinational corporations may be going away.     

An Analysis of U.S. and Latin American Financial Accounting Ratios

Financial accounting ratios of non-U.S. companies are subject to misinterpretation by U.S. investors due to differences in accounting principles, institutional practices, and economic environments. The purpose of this study is to compare selected financial accounting ratios of companies from seven Latin American countries with those of a matched sample of U.S. companies, and explain any observed differences in the ratios based on the above three factors. In general, the results indicated that the liquidity, activity, and coverage ratios of the Latin American companies were lower than those of the U.S. companies. The profitability ratios varied, however, with the profit margin on sales generally higher for the Latin American companies, the return on assets mixed, and the return on equity ratios not significantly different between the Latin American and U.S. companies.