The determinants of capital structure for Japanese multinational and domestic corporations

Theoretically, it is often argued that the international diversification of earnings should enable multinational corporations to sustain higher levels of debt than domestic corporations. Studies using US multinationals often report lower leverage for multinationals relative to domestic corporations, while studies on samples of French and Canadian multinationals find the theoretical relation. This paper extends the research to Japanese multinationals. We find that being a multinational corporation is a significant variable in explaining capital structure for a sample of Japanese firms. We also find that Japanese multinationals have significantly lower leverage than domestic firms. Using a pooled cross-sectional time series regression model with dichotomous interaction variables, the difference in leverage between multinational and domestic corporations is explained by firm age, business risk, free cash flow, growth, nondebt tax shields and political risks. Agency costs, bankruptcy risks, collateral value of assets, foreign exchange risks, profitability and size are not significant in explaining differences in capital structure between multinational and domestic corporations.