Multinational capital structure and financial flexibility

We address multinational capital structure decisions when firms have varying degrees of financial flexibility for shifting income and/or tax shields between subsidiaries. We find: (1) firms can use leverage to dramatically reduce negative valuation effects from operating in a high-tax country; (2) financial flexibility is a key determinant of optimal capital structure, acting as both a substitute and a complement for leverage; (3) multinational firms derive a synergistic effect from financial flexibility, which can enhance their value beyond that for a single-country firm from a low-tax jurisdiction; and (4) optimal capital structure typically differs substantially across subsidiaries, with each having positions in multiple currencies.