An Investigation of the Relationship between International Activities and Capital Structure

This paper investigates the effect of international activities on capital structure as measured by a debt ratio. Prior studies have examined factors that affect the debt ratio for both multinational corporations (MNCs) and domestic corporations (DCs); however, the incremental explanatory power and the direct effect of the extent of international activities on capital structure have not been tested. This paper uses multiple regression analyses to add measures of international activities after controlling for measures pertinent to both MNCs and DCs. Using a sample of 18,495 observations from the Compustat Tape, we find 1) consistent with results reported by prior studies, the debt-equity ratio is negatively related to both bankruptcy costs and growth options; 2) after controlling for bankruptcy costs and growth options, MNCs have lower debt-equity ratios than DCs; 3) within the MNCs, the debt-equity ratio is positively related to the degree of internationalization, and this calls for further investigation.