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I C I

An important issue facing multinational enterprises (Ms) involves establishing appropriate


capital structure levels for their foreign operations. his process is extremely difficult because of
cultural norms, market liquidity, exchange rate risk, capital availability, political and economic
considerations, and various accounting systems which are prevalent abroad. Hodder and Senbet
(J) developed an international capital structure equilibrium characterized by differential
foreign taxation and inflation settings. hey found that corporate tax arbitrage played an
important role in establishing an international capital structure equilibrium.(a)

Although there has been plenty of research focusing on the primary determinants of capital
structure, there is still disagreement regarding which factors significantly affect a firm's capital
structure. An examination of the economic and finance literature shows that firm size, country
location, and industry classification are often cited as having different effects on capital structure
(Aggarwal and Baliga JëÔ Scott and Martin JÔ¦ Sekely and Collins Jëë). As attention
shifts from domestic to international analyses, empirical proof of capital structure determinants
becomes more challenging.

An important goal of this exploratory study is to identify some of the major determinants of
capital structure among .S. foreign subsidiaries. It attempts to estimate the relative importance
of both firm-specific and environment-related factors affecting foreign subsidiaries' choices of
capital structure. his study takes a unique approach to this issue by using questionnaires to
collect data on the capital structure decision of foreign subsidiary managers. Several estimator
models were used to identify the factors that influenced the capital structure decision of the
foreign subsidiary managers.
his paper on determinants of international capital structure for foreign subsidiaries contains five
sections. he first section provides a brief overview of the theoretical and practical issues of
international capital structure analysis. he second section focuses on the areas of data collection
and questionnaire design. he third section describes the regression models that are used in our
analyses. he fourth section discusses various statistics and determinants of capital structure. he
final section gives the conclusions of our study.

he results of this study found that age of subsidiary and financial risk were important factors in
determining a foreign subsidiary's capital structure. hese findings were also true when all
relevant variables were considered in the logarithm form and when an alternative risk variable
was considered. In addition, it was learned that total asset turnover and ownership structure were
important factors in determining subsidiaries' debt ratios.

LI A  
I

he issue of an optimal capital structure has been the subject of a tremendous amount of
controversy as theorists debate whether or not an optimal capital structure even exists. Several
important theoretical studies on capital structure have led to a plethora of research that continues
to this day (Miller JÔÔ Modigliani and Miller J¦ë, J½xl itman and essels Jëë Hodder
and Senbet J).

In one of the most important studies in modern corporate finance, Modigliani and Miller (J¦ë)
proposed that under certain assumptions (i.e., perfect capital markets and no income taxes), a
firm's value was not affected by the proportion of debt and equity it had in its capital structure.
Later, Modigliani and Miller (J½x) showed that with the presence of a corporate income tax, a
firm's value was maximized when its capital structure consisted totally of debt. Miller (JÔÔ)
extended the analyses to include personal income taxes and argued that the value of a firm was
not affected by its capital structure.

ther researchers have argued that capital structure can be affected by additional factors. hese
theorists note that firms do not expect to benefit from the tax deductibility feature of interest
payments without also incurring additional expenses such as bankruptcy costs (Kraus and
Litzenberg JÔx Stiglitz JÔa) and agency costs (Barnea, Haugen, and Senbet JëJ Jensen and
Meckling JÔ½). Also, financial managers may use changes in capital structure as a signaling
device to send information to the market about the future performance of the firm (Leland and
Pyle JÔÔ Myers and Majluf Jë).

An analysis of the empirical literature indicates that among the factors examined as potential
determinants of capital structure, firm size, industry classification and country location have
received the most attention by researchers (Aggarwal and Baliga JëJ Scott and Martin JÔ¦
Sekely and Collins Jëë John, Senbet, and Sundaram JJ). hile each of the factors has been
carefully examined, there is still disagreement regarding how important these factors are in
determining capital structure.

Several studies showed that firm size was an important determinant of capital structure (Ferri and
Jones JÔ Scott and Martin JÔ¦), while others presented evidence that size was not a major
factor in determining capital structure (Aggarwal and Baliga JëÔ). here have also been many
studies that have supported the claim that industry classification affects capital structure
(Aggarwal and Baliga Jëa Ferri and Jones JÔ Sekely and Collins Jëë), while others
contradicted it (aidu Jëx).