International Knowledge Spillovers and Capital Structure of Multinational Affiliates

This paper investigates how knowledge transferred within multinational corporations affects capital structure decisions of foreign affiliates. Employing the unique dataset on Korean multinationals and their employment structure of foreign affiliates, we measure the knowledge transfer through human interactions using the ratio of expatriate managers to total employees. We document that affiliates with more expatriate managers tend to maintain lower leverage, suggesting the affiliates with high level of intangible assets passed to through expatriate managers opt for low debt financing. We further show that the negative effect on leverage is more pronounced when parents/affiliates are involved with greater intangible assets and the host countries have less knowledge assets in place. Our two stage least square estimation also confirms the negative relation between expatriate managers and financial leverage in foreign affiliates