Debt financing and sharp currency depreciations: wholly versus partially-owned multinational affiliates |
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Authors: | Shafik Hebous Alfons J Weichenrieder |
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Institution: | (1) Goethe University, Frankfurt, Germany;(2) Vienna University of Economics and Business, Vienna, Austria;(3) CESifo, Munich, Germany |
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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. |
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