Debt Financing and Sharp Currency Depreciations: Wholly vs. Partially Owned Multinational Affiliates

27 Pages Posted: 16 Jan 2010

See all articles by Shafik Hebous

Shafik Hebous

International Monetary Fund

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2009

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.

Keywords: foreign direct investment, capital structure, ownership structure, currency crises, corporate taxation

JEL Classification: F23, G32

Suggested Citation

Hebous, Shafik and Weichenrieder, Alfons J., Debt Financing and Sharp Currency Depreciations: Wholly vs. Partially Owned Multinational Affiliates (December 2009). CESifo Working Paper Series No. 2892, Available at SSRN: https://ssrn.com/abstract=1536395 or http://dx.doi.org/10.2139/ssrn.1536395

Shafik Hebous

International Monetary Fund ( email )

Washington, DC
United States

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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